You know what they say, it takes money to make money. Often, your money can make you more money when you invest it well or place it in high yield savings accounts. Other times, though, your funds can remain stagnant. This is known as dead money.
Dead money is a term used to refer to cash that isn’t earning interest or investments that aren’t growing or producing dividends. In other words, dead money doesn’t help your wealth grow.
Definition and Examples of Dead Money
Len Hayduchok, a Certified Financial Planner (CFP) and CEO of Dedicated Financial Services, told The Balance by email that dead money can be any allocation that is not advancing your financial goals. Dead money can include cash in the bank that is more than you need for liquidity or an investment that has not grown or generated any dividends in years. It can even be a life insurance policy that no longer meets your needs with a small death benefit or a cash value that is dwindling.
“All these are examples of opportunities to make your money work more effectively for you,” Hayduchok said.
Hayduchok explained that you also may hear dead money referred to as “unproductive money” or “lazy money,” although “the term lazy really refers to the investor who is not taking steps to improve her or his situation,” Hayduchok said.
While dead money is often viewed in a personal context, you may come across it in the business world, where hoarding cash on balance sheets is often viewed as a form of dead money.
Sometimes politicians and activist investors push for these company cash reserves to be put to use so they won’t be considered dead money anymore.
How Dead Money Works
The truth is, dead money isn’t doing any work for you. Picture cash just sitting in the bank for years or an investment that has stagnant growth and doesn’t generate any dividends. While your funds may not be diminishing, they aren’t growing either.
Types of Dead Money
Dead money can take different forms and can apply both to personal and business finances. It can be any of the following:
- Cash in the bank that isn’t earning much interest
- Investments that are not generating dividends or growing
- A life insurance policy with a small death benefit
- Hoarded cash on corporate balance sheets
- Cash saved at home
- Some bond funds
- Illiquid and underperforming non-traded investments (real estate, limited partnerships, private investments, annuities, etc.)
Alternatives to Dead Money
If you’re unhappy with the fact that you have dead money that isn’t growing or helping you make financial progress, you can put those funds to work.
“You always need to be asking yourself, What is the purpose of a holding at this time? What goal is it fulfilling for you? It doesn’t matter why you put it in place at one time. Everything has to be purposeful and if it is not, it needs to be eliminated—regardless of how large or small the account is,” Hayduchok said.
Nolan Baker, Investment Advisor Representative and founder of The Retirement Guys Formula LLC, told The Balance over email that the alternatives to dead money depend upon the investor’s goals, objectives, and time frame. For example, some families have large cash positions because they are uncomfortable with the risk of stocks.
Baker suggested that an alternative could be an indexed universal life insurance policy with a waiver of surrender charge that offers the ability for the account owner to participate in market gains, but be protected against market losses.
“At the same time, the account owner gains the benefits of life insurance, which could include tax benefits, increased growth potential, a death benefit, and chronic illness coverage,” Baker said.
Some “illiquid” and underperforming accounts offer investors the ability to redeem a small portion of the account through quarterly or yearly redemptions. This can be a way for an investor to slowly reduce exposure to the dead asset and move into a new opportunity that could better meet the expected results.
“The key is to read the fine print on redemptions and ask about liquidity options,” Baker said.
What It Means for Individual Investors
According to Hayduchok, the biggest cost related to dead money is the opportunity cost for those funds to accomplish something productive for you. Hayduchok said that excuses like “it’s not that bad” or “leave it the way it is for now” cause consumers to miss out on financial opportunities.
Baker feels differently, and wants individual investors to know that dead money isn’t always a bad investment. “Sure, the expected return on most cash or fixed income investments after taxes and inflation might be close to zero, or worse a negative real return, but it still can make sense to own these assets,” he said.
For example, Baker believes it is still a good idea to keep six months’ worth of cash reserves in an emergency account.
An investment only becomes “dead money” when the investor gives up looking for options. It’s never too late to change how those funds are being used.
You can also hold out hope that the tides will turn over time. “One of my investment properties seemed like dead money after the real estate crash of 2008, so I kept it as a rental property to generate income and recently sold it when the real estate market recovered,” Baker said.
- Dead money refers to cash that isn’t earning interest or investments that aren’t growing or producing dividends.
- Dead money can come into play in our personal or business finances.
- Dead money isn’t always a bad thing, as having some cash readily available can come in handy.