"Is it time to start investing your dead money in order to build wealth? Having lots of cash is great but it will not help you keep up with inflation and you will lose buying power over time."
By Allan R. Kirby
What is dead money?
Dead money is a term used to describe how keeping money in cash will result in no growth in value and in fact lose value over time due to inflation. Like many experts, I tend to advise people to find ways to grow their money, even with very low-risk investments such as high-interest bank accounts and Certificates of Deposits (CD) that will allow you to collect some interest on your principle.
It's not surprising to see that people are hesitant to invest their money or even put it in a bank because of the fear of losing their money. Some of this fear of participation is the direct result of the great recession of 2008. During this time stocks crashed significantly, banks closed and many investors lost their life/retirement savings. The high watermark was the Bernard Madoff $65 billion Ponzi scheme encompassing thousands of investors that was uncovered in 2008. Ever since then there appears to be a deep-rooted fear from older Americans to invest for fear of losing more money.
Keeping some cash is a good idea
I have always preached the need to have money available in case it is needed, not just for emergencies but also for unexpected expenses, because it's great to have the cash to pay for the bill. Unless you can pay the credit card off immediately, it's better not to use a credit card if your going to carry a balance and will require to pay interest. However, you might end up in a situation where you end up accumulating a large sum amount of money that is not growing over time. This is dead money, money that is not helping build wealth or at a minimum keeping up with inflation. I experienced a situation where I was accumulating money but I was not properly investing that money, missing out on building my savings up and creating additional wealth.
“It's a common error some people make, depositing money in low interest savings accounts with interest rates as low as .1%”
My experience dealing with dead money
When I was younger I learned to save my money to ensure I had something set aside in case of an emergency or unexpected expense. This has served me well over the years because I have had to dip into my savings in order to cover a few large expenses such as a new furnace. However, although I was always good at savings, I really never learned the value of putting my cash to work in order to build wealth.
Like most people, I was skeptical of investing my money because my cash was designed for emergencies, always available just in case something happened. This is great when you have a small amount of savings or cash on hand, but in my situation, the amount of money I accumulated over time became significant but my returns were either zero for cash or significantly less than inflation when my money was in a low-interest account, which today can be as low as .1%.
Basically, I had dead money and I really needed to do something about it. What I needed was a plan that would cover my emergency and unexpected expenses while also ensuring I could take the remainder of the money and invest it. Additionally, I did not want to lose any money from investing, my emergency fund was important to me so I knew I needed to keep my investments relatively low risk.
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The plan
To develop a plan to deal with my dead money I needed to ask myself a few questions such as:
What is the extra money for?
how soon will I need it?
how much do should I invest and how much should I keep in cash?
With these questions, I was able to effectively come up with a plan which included:
How much cash to have in my emergency fund.
How much money to invest in short and long-term investments.
The types of investments I should be making.
To give you an example, let's say I had $10,000 in my account for emergencies but have found over the years I have never need more than $2,000 at any one time.
$2500 high-interest savings account.
$2500 CD (Usually no more than 3 to 6 months).
$5000 in ETFs and bond funds
Since the money set aside is for emergencies and not for retirement I'm keeping my investments in lower-risk ETFs and avoiding single stock investments. This has turned out to be a great mix and I have seen growth over the last couple of years. I am not saying this is a perfect mix of investment mix, but it worked for me and I was able to see my money grow a much more respectable 4%, which is significantly more than the 0 to .1% I was getting before.
“Finding a balance between investing and cash takes time.”
Final Thought
This was a great exercise in learning to take dead money and putting it to work in order to help me build a little wealth. In my example, I was focused on building wealth in my emergency fund, but this can be applicable to any type of money you have. It does take time to determine a good balance between investing and keeping money in cash, but over time you will find what works for you. It’s most important to plan out and look at what you think you need to do in order to achieve your own financial goals. Something else I learned was that it's ok to keep some of my money in lower-risk investments such as ETFs instead of single stocks. As I had mentioned at the beginning of the article many people today are still unable to invest their money for fear of losing it. I however have found that you can still find lower risks investments to allow you to keep up with inflation.
Good luck!
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Questions and Answers
What does the term "dead money" cash mean?
Dead money is a term used to describe how keeping money in cash will result in no growth in value and in fact lose value over time due to inflation. Personal finance experts tend to advise people to find investments, even low rate investments such as high-interest bank accounts and Certificates of Deposits (CD) that will allow you to collect some interest on your money.
What does the term "dead money investing" mean?
Dead money investing is a term used in finance to describe how your money is showing little or no growth while also not keeping up with inflation over a period of time. Personal finance experts tend to advise investors to find investments that grow over time through appreciation of the investment, dividends, and/or interest above inflation.
What does the term "dead money stock" mean?
Dead money stock is a term used in investing describing how the stock of a company has either not appreciated or appreciated very little over a period of time. Generally speaking, investing experts tend to advise prospective investors to avoid these types of stocks if for example:
There are longer-term negative secular changes to the industry in which the company operates.
An inability for the company to create longer-term wealth for investors.
This is a MySmallBank.com blog written by Allan Kirby, who writes and produces Personal Finance articles and videos.