Outside money refers to financial reserves that are considered to be outside the scope of any degree of liability for those who are inside the general money base. This type of financial asset can take on many forms, including precious metals or cash that is held in different denominations of foreign currencies. Even assets that are backed by foreign bonds or stock holdings can often be considered outside money.
With outside money, there is no liability held that could possibly disrupt the flow of the economy. For example, an investor who holds cash in one or more foreign currencies is not having any type of impact on the local economy. That remains the case, until the investor chooses to convert those cash assets into the local currency and use the cash to make purchases within that economy. Until that happens, the cash is considered to be beyond or outside the economy and does not figure into the monetary economics for the country of residence.
The benefit of outside money is usually that the owner of those assets is able to amass considerable wealth and hold it for long periods until it is needed for some specific purpose within the economy. Typically, outside money is not domestically taxed until the assets actually enter the economy, although some nations do have tax laws that require reporting the existence of those assets and may even assess taxes using a table that is different than the one used to assess resources that are considered inside. When this is the case, investors can often take advantage of investment opportunities found on the international market and generate returns that make it possible to increase wealth and create a more diversified financial portfolio.
Tracking outside money is important for more reasons that simply making sure 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 potential for returns on those investments. If certain outside money assets are not performing as anticipated, the investor will want to review the potential for those assets and make an informed decision regarding whether to hold onto the assets or sell them before the returns decrease to an unacceptable level. Assuming the risk now outweighs the potential for future returns, the investor can sell off the assets and use the proceeds to identify other investments that are likely to generate an acceptable level of outside money returns.