When you invest in stocks or mutual funds or add it to a savings account, you’re putting that money to work. The goal in doing so is to grow your initial investment or deposit with interest. Money that’s allowed to sit idle, on the other hand, isn’t working for you. Having idle funds isn’t necessarily a bad thing. However, it’s important to understand how it can impact your ability to build wealth over the long term.
Definition and Example of Idle Funds
Broadly speaking, idle money is money that is not serving a specific purpose or use. Different entities may have idle funds, including:
Small businessesCorporationsLocal and state governmentsFederal governmentsIndividuals
How idle funds are defined for each of these entities can vary. For example, idle funds for a small business may be any money that’s not immediately needed to fund day-to-day operations or business investments. In local and city government situations, idle funds can mean money that has not yet been spent to fund projects such as public works, housing development, social services, or economic development.
Alternate name: Idle cash, idle money, idle savings
You may have some idle funds sitting around without realizing it. For example, if you’re keeping your savings in a drawer at home, then you’re not putting it to use by depositing it or investing it, which means you’re not earning any interest on it, either.
How Idle Cash Works
Idle cash, idle money, and idle funds all essentially mean the same thing: Money that is sitting idle. There are different reasons why a person, business, or government may have idle funds. For example, you might have money sitting in your checking or cash management account that you eventually plan to transfer to your online brokerage account. Until you transfer those funds, however, they’re sitting idle and not earning interest for you. A small business owner, meanwhile, may have idle funds if they’re piling up cash reserves in a bank account that doesn’t add interest. They may have earmarked these funds to purchase new equipment, make renovations to their business premises, or pay an upcoming tax bill. Or they may simply keep a few thousand dollars on hand in petty cash. But if that money isn’t earning interest, it’s still sitting idle in the meantime. The common thread is that idle funds are not being used to their potential. However, changing idle funds to active funds can be as simple as opening a brokerage or savings account, or using the funds to make a business investment to help boost revenues.
How To Leverage Idle Funds
In the finance world, idle money can represent a wasted opportunity because your money has no chance to grow if it isn’t earning interest For example, let’s say you sell your car and you now have $10,000 in cash. You don’t plan to buy a new car anytime soon, so you’re trying to decide what to do with the money right now. Option A is sticking it under your mattress until you need it, while Option B is putting it in a savings account. If you take Option A, your money has zero room for growth. If you choose Option B and you earn a 1% APY, you’d earn $100 in interest if you keep the money there for one year. You could also consider investing in stocks to potentially earn what’s called compound interest, which is interest earned on your initial investment plus accumulated interest (interest on interest). For instance, say you take that $10,000 and invest it in the market. Assuming you earn a 7% annual rate of return, using a compound interest calculator, your money can grow to $10,700 after one year. If you left that money alone for 20 years, it could grow to approximately $38,697 at that 7% rate. You could grow it even more if you make additional deposits. The example above shows how costly having idle funds can be, particularly when you factor in inflation. Inflation represents a rise in the cost of goods and services over time. Investing is a way to counteract the effects of inflation if your money is growing faster than prices are rising. When you allow funds to sit idle, that creates more opportunity for inflation to erode your purchasing power over time.
