What is dead money?
It is money which is spent on something which does not provide anything of value to you.
Interest paid on consumer debt falls into this category. It is dead money because interest does not provide any tangible value to you. Some may argue that interest paid on a mortgage on a property provides some value because the value of the property increasing at a greater rate than the interest on the mortgage.
A fair point but falling house prices have meant that some houses have negative equity on them. All the more reason for you to reduce that mortgage as quick as possible, more so when the mortgage interest rate is low.
Dead money can also be money which is locked away in an investment for very little return. An example of this is money just simply left in a savings account for a period of time. Inflation and the tax payable on the paltry interest means that your money is losing its value over a period of time. The only money which is left in an account such as this is money which is needed in the short term.
Just stuffing your money under the mattress is another form of dead money for the same reason as leaving it in a low interest account and this is because it is not earning any money.
If you think that just leaving money lying around is foolish enough most people own stuff which is worth money and if this was sold the money could be earning an income through shares or other investments. Most people own stuff which can be converted back into cash and put to work for them. Anything which is no longer needed and is just gathering dust fits this category.
It is important to know the difference between an asset and a liability. An asset increases your wealth but a liability is a drain on your finances.
Some investors consider the equity in their home as “dead money”. It all depends on where you are coming from because there is a clear choice between having equity in your home or having a debt. I recall someone told me years ago that he knew someone who took out a mortgage on his home to purchase shares then Black Monday took place. For younger people, the 1987 sharemarket crash which occurred during October of that year was named “Black Monday.”
After the crash his shares were worth a lot less than the loans owing on them.
At the end of the day that is the risk with investing for capital gain and investors must weigh up the risks of losing their capital against the likely rewards.
If you have some spare cash lying about doing nothing and you are wondering whether or not you should invest it in something risky but has the potential to grow, the one question you should be asking is “What is this money for?”
Only then will you know whether this is money you should be taking risks with.
About this article
This article is the opinion of the writer and may not necessarily be applicable to your personal circumstances therefore caution is advised. You are welcome to use this article as content for your website/blog or ebook. Feel free to share this article.
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