Guide to Idle Funds: Where to Put Them

Idle funds are funds that aren’t serving any specific purpose or working for you in any way. This is a term that’s often used when discussing business and government finance. It’s common for government entities and corporations to have idle money sitting in cash reserves until it’s ready to be used for specific expenditures.

It’s also possible for individuals to have idle cash. For example, you might keep a few hundred dollars stashed in your dresser. That money is technically idle, since it isn’t earning you any interest. The good news is that it’s easy to put idle funds to work so your money has a chance to grow.

Learn how to do just that with this guide, which addresses:

•   What are idle funds?

•   How do idle funds work?

•   What are examples of idle funds?

•   What are the pros and cons of idle funds?

•   Where can you park idle funds?

What Are Idle Funds?

In personal finance, idle funds or idle savings refers to money that isn’t being invested or otherwise earning interest. Idle funds may be held in cash or sit in a deposit account at a bank, credit union, or other financial institution. They can be called idle savings, idle cash, or idle money, but it all means the same thing. It’s money that’s doing absolutely nothing. It’s not appreciating in any way or earning you interest.

Here’s another way to think of idle funds. Imagine you’re in a car that’s idling at a stoplight. You’re not moving forward toward any specific destination and you’re not gaining anything; in fact, you’re just burning gas. When you allow your money to sit idle, you’re not getting closer to your financial goals either.

As mentioned, businesses and governments may keep idle savings on hand that don’t earn any interest. They can do so if they plan to spend that money later for a specific purpose, such as an expansion project or funding government contracts. But it’s possible that you might have idle funds without realizing it, which can be a missed opportunity to build wealth.

How Do Idle Funds Work?

Idle funds work by, somewhat ironically, not working for you. Normally, when you deposit money into a savings account, money market account, or investment account, those funds can grow over time. The bank may pay you interest on deposits, or you earn a solid rate of return on the money you’ve invested with your brokerage. Either way, you can end up with more money than you started with thanks to compounding interest.

Compounding means earning interest on your interest. The more often interest compounds and the higher the interest rate earned, the more your money can grow. For example, if you deposit $1,000 into an interest-bearing account and earn a 7% annual rate of return, that initial amount would grow to $7,612 after 30 years, even if you never add another dime.

With idle savings, that doesn’t happen. Your money doesn’t earn interest or any kind of return. If you deposit $1,000 into an idle funds account (or have it sitting in a piggy bank) on Day 1, you’d still have that same $1,000 on day 10,000, assuming you don’t make any withdrawals. Since you’re not putting money into a savings account or another account where it can earn interest, idle funds don’t benefit from the power of compounding.

What Is the Value of Idle Funds?

You might assume that the value of idle funds is the same as the money’s face value. So $100 in idle cash would be worth $100. But it’s important to keep the impact of inflation in mind. Inflation refers to a continuous rise in consumer prices for goods and services for an extended time period. In the U.S., the Consumer Price Index (CPI) is one of the most commonly-used measures for tracking inflation.

When inflation is high (as it recently has been), your money doesn’t go as far. If gas goes from $3 a gallon to $5 a gallon, for example, it costs more to fill up your tank. When you have idle funds that aren’t earning interest, your money can’t keep up with the pace of inflation. That’s why personal finance experts recommend keeping some of your money in a savings account or investment account as a hedge against the toll inflation takes.

Real Life Examples of Idle Funds

Idle money can take different forms but again, it’s all money that isn’t working for your benefit or advantage in some way. Here are some examples of idle funds you might have right now:

•   You get a rebate check in the mail that you forget to deposit. Since this money isn’t being used to grow savings, it’s idle.

•   Every day, you dump out your coins and dollar bills into a jar that you keep in your closet. Even though you’re saving, this is idle savings because you earn a 0% interest rate.

•   Instead of separating some of your money into a savings account, you keep all of your funds in a checking account that doesn’t earn interest. While you might use some of this to pay bills and technically put it to work that way, the rest of your money in the account is idle because it doesn’t grow.

You can also have idle funds if you have money in any type of savings or investment vehicle that doesn’t earn interest. A zero-coupon bond, for instance, doesn’t pay interest to you but instead, allows you to purchase the bond at a deep discount.

Pros of Idle Funds

For governments and businesses, it can make sense to have some idle cash on hand. For example, if there’s a budget shortfall, then a corporation could dip into their idle funds to cover operating expenses.

In terms of why having some idle funds might be a good thing when discussing your personal finances, here are the main pros:

•   Idle funds can be highly liquid, meaning you can access your money when you need it.

•   Keeping idle money in cash at home means you’re not paying steep fees to a bank.

•   Waiting to invest idle savings gives you time to research the best investment options for you.

•   There’s generally very little risk of losing money in idle funds.

•   Putting idle funds to work can be as simple as opening an interest-bearing savings or investment account.

Cons of Idle Funds

While there are some positives associated with idle funds, there are also some drawbacks to keep in mind. Here are some of the biggest cons of idle money:

•   When cash sits idle, it’s not earning interest, and you’re not growing wealth.

•   If you’re keeping idle savings in cash at home, you run the risk of it being lost or stolen.

•   Keeping all of your money in idle funds means you’re not working toward any financial goals.

•   Delaying investment of idle funds can mean missing out on the power of compounding interest.

•   Cash sitting in idle funds can lose purchasing power as inflation rises.

Parking Places for Your Idle Money

If you’d like to put your idle funds to good use, there are several places you can keep that money in order to earn interest. When deciding where to keep idle cash, consider what kind of access you’d like to have to those funds, the interest rates you could earn, and the fees you might pay.

Here are some of the different savings accounts to have for idle funds if you’d like to grow your money.

Certificates of Deposit

A certificate of deposit account is a time deposit account. When you deposit money into a CD, you’re agreeing to leave it there for a set time period, until what is known as its maturity date. The bank pays you interest on your deposit, and, once the CD matures, you can withdraw your initial deposit and the interest earned. Or you could roll it over into a new CD.

CD accounts can be a good place to keep idle funds that you know you won’t need any time soon. Online banks can offer competitive rates on CDs with no monthly fees. Just keep in mind that you might pay an early withdrawal penalty fee if you take money from your CD account before maturity.

Brokerage Account

Brokerage accounts are designed to hold money that you invest. For example, you can open a taxable investment account or an Individual Retirement Account (IRA) at a brokerage. The rate of return you earn on your money can depend on how you choose to invest it.

Some brokerages can also offer cash management accounts to hold money that you plan to invest later. These accounts can function like checking accounts, but they can also earn interest. Depositing some of your idle funds into a cash management account at your brokerage can help you earn some interest until you’re ready to invest it.

Recommended: How to Set up a Health Savings Account

High-Yield Savings Account

A high-yield savings account is a savings account that pays an above-average interest rate and annual percentage yield (APY). Traditional banks can offer high-yield savings accounts but you’re more likely to get competitive rates from an online bank. Online banks can also make high-yield accounts more attractive with low initial deposit requirements and no monthly fees.

Opening a high-yield savings account for idle funds could be a good move if you’d like to keep some of your money liquid and accessible. You can link a high-yield savings account to a checking account for easy transfers. Depending on the bank, you may also be able to get an ATM card with your savings account for added convenience.

I Bonds

An I Bond is a type of savings bond that’s issued by the U.S. Treasury. I Bonds can earn a competitive interest rate that’s based on inflation. Putting money into I Bonds could be a good use of idle cash if you’re worried about inflation eating into your spending power. Just keep in mind that I Bonds, like CDs, are designed to be longer-term investments and cashing them out early could cost you some of the interest earned.

Banking With SoFi

Having idle funds (money that’s just sitting and not appreciating) isn’t necessarily a bad thing. However, it’s important to understand what you could be missing out on if your savings or cash isn’t earning any interest. If you’re unsure what to do with idle money, an online bank account can be a great place to keep your cash while you weigh the options.

SoFi offers a Checking and Savings account in one convenient banking package. You can pay bills and save in one place, while earning a hyper competitive APY on deposits. And you won’t pay any account fees, which can help your money grow faster.

FAQ

What is the best option for me to activate idle funds?

If you have idle funds, depositing them into an online savings account can be the fastest way to put them to use. Online banks can offer savings accounts with great interest rates and no monthly fees. You can link your online savings account to your checking account for convenient access to your money.

Are idle funds always a bad thing?

Idle funds aren’t always a bad thing if you’re planning to invest or save them at some point in the near future. For example, you may have $1,000 sitting in a cash management account at your brokerage that you plan to invest in stocks. Since that money does have an end goal, the fact that it’s idle in the meantime isn’t so bad.

Can idle funds every improve your money?

Having some idle funds could offer reassurance if you’d like to have a go-to stash of cash on hand for emergencies. Whether idle funds can improve your money depends on where you’re keeping them, how you plan to use them, and whether you have other funds that are actively working for you and earning interest.

Photo credit: iStock/Ivan Halkin

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