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External money, such as foreign currency or assets, is held outside of a country’s economy and can accumulate wealth tax-free until converted. Investors can take advantage of international markets for returns and must track investments for potential returns and risks.
External money refers to financial reserves considered outside the scope of any degree of responsibility for those within the general monetary base. This type of financial asset can take many forms, including precious metals or cash, which are held in different denominations of foreign currencies. Even assets backed by foreign bonds or equities can be considered out-of-money.
With foreign money, there is no responsibility assumed that can stop the flow of the economy. For example, an investor holding money in one or more foreign currencies is not having any kind of impact on the local economy. This remains the case, until the investor chooses to convert these assets into cash in the local currency and use it to make purchases in that economy. Until that happens, money is considered beyond or outside the economy and does not figure in the monetary economy of the country of residence.
The benefit of outside money is usually that the owner of these assets is able to accumulate considerable wealth and hold it for long periods until it is needed for some specific purpose in the economy. Typically, external money is not taxed internally until the assets actually enter the economy, although some nations have tax laws that require reporting the existence of these assets and may even assess taxes using a different schedule than the one used to value assets that are considered internally. . In this case, investors can usually take advantage of investment opportunities found in the international market and generate returns that allow them to increase wealth and create a more diversified financial portfolio.
Tracking foreign money is important for more reasons than simply ensuring that taxes are assessed properly or as a means of creating wealth that can be introduced into an economy at a later date. As with any type of financial activity, investors want to focus on the return potential of these investments. If certain foreign currency assets are not performing as expected, the investor will want to review the potential of those assets and make an informed decision on whether to hold on to the assets or sell them before the returns decline to an unacceptable level. Assuming that the risk now outweighs the potential for future returns, the investor can sell the assets and use the proceeds to identify other investments that are likely to generate an acceptable level of external cash returns.
Asset Smart.
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