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How to make idle money work for you, not others

Saturday, 24 December 2011 - 10:30am IST | Agency: dna

Rather than burning money or keeping it idle, you may as well spend it or use it to speculate, gamble, so on.

Idle money is as good as burning it. It does not give pleasure to anyone. Rather than burning money or keeping it idle, you may as well spend it or use it to speculate, gamble, so on. At least, such activities give a brief moment of pleasure, don’t they?

Idle money does not work for you. Instead, it works for others. For example, if money is left idle in a savings account in a bank, which until recently was earning around 3% (now it is around 7% at Yes Bank), for more than six months, you have lost out on earning 8% by not placing it in a fixed deposit with the same bank.

In absolute terms, idle money of Rs1 lakh would have earned Rs1,500 for six months (assuming 3% interest rate) in a savings account. But, if you had placed the same money in a fixed deposit at 8%, you would have earned Rs4,000 for six months. In effect, you may have binned Rs2,500 while the bank would ‘save’ Rs2,500 because you let the money lie idle in the savings account.

You could have earned and spent the extra Rs2,500 by placing your money in a fixed deposit rather than a savings account. As you can see, the beneficiary here is the bank, not you. Why let the bank benefit from your hard earned money?

The fundamental of fixed-income investing is that interest is earned every day. You should, therefore, look to maximise the interest earned on your investments. If you don’t, then, in effect, you burn money.

So, what is idle money? How to ensure it does not stay idle? How to make money work for you?

Money left in cash at home (not black money) is idle. Money left in low-interest instruments is idle. Money left in financial products that has no relevance to your portfolio is idle.

Let me elaborate. Cash lying idle at home can earn at least 6% in a savings bank account. Money in a savings bank account if not required for liquidity can earn 8% or more in a fixed deposit. Money left in a fixed deposit can earn more in liquid schemes of mutual funds or can earn more in FMPs (Fixed Maturity Plans).

Money invested in financial products that you do not require (such as investments in mutual fund schemes or insurance schemes that are actually earning less than even a bank savings deposits) is idle. You should revisit such investments and look to shift it out as quickly as possible as the charges keep adding up. Mutual funds and insurance companies charge fees that accrue on a daily basis and your investment should be making good returns to compensate for the fees you pay. If your fund is offering 4% returns after charging 2% fees, it’s time to shift it out.

There is no bigger wastage of money than leaving money idle.

Money that could have been spent fruitfully or reinvested for savings is sacrificed.  You will be the loser while the gainer is usually a bank or a financial service provider.

Start making your idle money work for you and gain in the process. There is no better time to make idle money work for you than now.

The author is the editor of www.investorsareidiots.com, a website for investors.

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