Near Money
Refers to highly liquid assetst that can be easily converted into cash and are considered close substitutes for actual money
What Is Near Money?
A phrase from financial economics, "near money," also known as "quasi-money" or "cash equivalents," refers to non-monetary assets that are very liquid and may be changed into cash with little effort.
Analysts use this phrase to describe and measure the liquidity and proximity of liquidity for financial assets. Various market situations take near money into the account.
To analyze corporate financial statements and control the money supply, it is crucial to comprehend quasi-money. The examination of cash equivalents may be useful in all forms of wealth management since it serves as a gauge for risk, conversion of cash equivalents, and cash liquidity.
For many years, quasi-money has had a significant impact on financial research and economic issues.
For evaluating liquidity, financial analysts see near money as a key notion. The idea of cash equivalents is used by central banks and economists to determine the various levels of the money supply, with the proximity of cash equivalents used as a criterion for categorizing assets as M1, M2, or M3 assets.
In general, this term refers to all of an entity's highly liquid funds together. The liquidity of foreign currencies will change depending on the actual conversion times. Transaction costs or withdrawal penalties may potentially be other variables impacting near money.
Saving accounts, certificates of deposit (CDs), foreign currency, money market accounts, marketable securities, and Treasury Bills are a few examples of near-money assets.
Most people accepted gold and silver coins as currency up to the 18th century. Since then, bank notes and deposits that may be transferred by check have appeared.
Among less liquid assets, everything the owner has that may be converted into cash nearly instantly is seen as near money.
Key Takeaways
- Near Money, also known as quasi-money or cash equivalents, refers to highly liquid assets convertible to cash.
- Financial analysts use this concept to assess liquidity and measure the ease of converting assets to cash, impacting wealth management and monetary policy.
- In Wealth Management, near money adjusts portfolios based on risk tolerance—conservative investors favoring liquid assets like Treasury Bills, while those needing liquidity opt for money market funds.
- In Money Supply Analysis, economists categorize assets into liquidity tiers (M1, M2, M3), shaping insights into money supply dynamics and central bank policies.
Uses of Near Money
Its significance in the economy, investment portfolios, and everyday transactions cannot be understated.
Near money bridges the gap between cash and other financial assets, providing individuals and institutions with options that combine relative safety, liquidity, and, in some cases, modest returns.
The demand for near money can serve as an economic indicator. For instance, a surge in demand for these assets might indicate that businesses and consumers are becoming more risk-averse, possibly anticipating an economic downturn.
It is used in many fields, including wealth management, corporate liquidity, and the money supply. Let's look more into this below.
Wealth Management
It is helpful when adjusting portfolios for individual investors based on their degrees of risk tolerance. Investors who are less capable of taking risks or less willing to do so will devote more of their portfolio to highly liquid assets, such as cash equivalents.
People who need liquidity frequently will invest in a variety of near-money assets, including Treasury Bills, money market funds, and high-yield savings accounts.
All of these assets produce results that are close to the risk-free rate. Since there is little to no default risk, the holding duration is often brief, and liquidity is strong, the risk-free rate is a suitable reward.
High liquidity may be necessary for a variety of reasons. If one is about to retire, for instance, or if a sizable chunk of money is needed to pay for their child's post-secondary education.
Additionally, some people may not want to take any risks or take the chance of seeing their cash decline due to market fluctuations. Due to its safety and liquidity features, it retains its worth during both economic booms and recessions.
It is a suitable use of assets in these circumstances since investors may be guaranteed safety and can earn at least the risk-free rate in exchange.
Corporate Liquidity
For corporate liquidity, also named corporate treasury, to maximize cash management for treasury departments of firms and other organizations, near money is very useful.
The near money of a corporation is shown in the liquidity analysis as the cash and cash equivalents on the balance sheet. It is taken into consideration while assessing an organization's current ratio and fast (acid-test) ratio.
Cash, cash equivalents, marketable securities, and accounts receivable are examples of assets taken into consideration by the quick ratio.
The current ratio, on the other hand, examines assets that are more short-term, such as inventory that may be turned into cash. Both ratios show and compare how liquid a firm is by contrasting the number of assets with the number of current obligations.
Treasury departments must manage a company's cash inflows and outflows as well as its current cash balance to maximize working capital. Treasury departments calculate the amount of cash required to cover upcoming commitments and will do so by maximizing the cash balance.
Extra cash might be invested elsewhere or given back to shareholders. To ensure high liquidity for when the money is needed, cash on hand will be placed in assets with a short time to maturity.
Money Supply
The nearness of money is further developed by economists' study of the money supply. They do this by segmenting cash-equivalent assets into tiers of liquidity: M1, M2, and M3.
In general, the Federal Reserve (Fed) has three methods at its disposal to control the money supply: open market operations, the federal funds rate, and bank reserve regulations.
The money supply and its several layers can be changed by adjusting one or all of these factors. As a result, the tiers of the money supply are crucial in thorough analyses of central bank policies.
Federal economists typically take the ramifications for M1, M2, and M3 into account when the decisions are related to central banking. Following are the definitions of M1, M2, And M3:
- M1 excludes near money and concentrates on cash. It comprises all assets held in checking accounts, as well as cash, coins, demand deposits, and other small amounts of money.
- The M2 money supply has intermediate liquidity and contains near money. All of the items in M1, as well as savings accounts, time deposits under $100,000, and retail money market funds, are included.
- The widest evaluation of the money supply is M3. Its conversion allowance is the longest and is sometimes referred to as wide money. M3 consists of M1 and M2, as well as bigger, longer-term time deposits and institutional money market funds.
Money vs. Near Money
It is crucial to distinguish between money and near money in any evaluations of cash equivalents. Cash that is readily available for use as a transactional exchange medium, such as cash in hand or cash in the bank, is included in the definition of money. Converting the money to cash takes some time
Cash must be on hand for individuals and corporations to satisfy urgent obligations.
Depending on the research style, there are several types of near-money assets. When making any kind of financial choice, it is important to take into account how liquid nearby currencies are.
The difference between the two is made clear by looking at some of the uses of money
| Aspect | Near Money | Money |
|---|---|---|
| Definition | Assets that are not money but can be easily converted into money when needed. | A medium of exchange and store of value widely accepted in transactions. |
| Liquidity | Relatively less liquid compared to money; may require some time to convert into cash. | Highly liquid; can be readily used for transactions. |
| Examples | Savings accounts, certificates of deposit (CDs), Treasury bills, marketable securities. | Currency (coins and paper money), demand deposits (checking accounts). |
| Stability | Generally more stable in value compared to money; subject to market fluctuations. | Money's value may vary due to inflation and other economic factors. |
| Purpose | Often used as short-term investments or as a place to store funds temporarily. | Used for everyday transactions, savings, and as a store of value. |
| Acceptance | Not universally accepted as a medium of exchange; may require conversion to cash or other forms of money. | Universally accepted in transactions within a given economy. |
| Risk | Generally lower risk compared to money; subject to market and interest rate risk. | Subject to inflation risk and currency fluctuations. |
| Accessibility | Accessible through financial institutions and markets. | Easily accessible through banks and ATMs. |
| Regulation | Subject to regulatory oversight and may have restrictions on withdrawal or transfer. | Regulated by central banks and government authorities. |
| Interest and Returns | May offer interest or returns on investments, depending on the type of near money asset. | Typically does not offer returns in the form of interest (for physical money). |
| Portability | Can be less portable if held in the form of certificates or digital assets. | Highly portable, especially in the form of cash. |
Money serves as a widely accepted medium of exchange and store of value for everyday transactions, while near money, though less liquid, can be easily converted into cash and is often used for short-term investments or temporary fund storage.
Near Money FAQs
Near Money primarily serves as a bridge between cash and other assets, offering high liquidity and low risk.
Common examples of near money include savings accounts, certificates of deposit (CDs), money market accounts, Treasury bills, and other short-term investments that can be readily converted into cash without significant loss of value.
Near money differs from actual currency in that it is not directly used for transactions in the same way as physical money or digital currency like banknotes or coins.
Near money is typically used as an investment or a means of storing wealth, whereas currency is used for day-to-day transactions.
People invest in near money assets for several reasons, including safety, liquidity, and the potential for earning a return on their investment. Near money assets are considered safer than riskier investments like stocks and offer a degree of financial stability.
Yes, near money assets can be subject to inflation risk. If the interest or returns earned on these assets do not keep pace with inflation, the real purchasing power of the funds may erode over time.
Near money assets are often included in diversified investment portfolios to provide stability and liquidity. They can act as a buffer against market volatility and provide a source of funds for emergencies or opportunities.
You can invest in near money assets through banks, credit unions, brokerage accounts, and government institutions. Common near money options include opening a savings account, purchasing Treasury bills, or investing in money market funds.
Many near money assets, such as savings accounts and CDs, are typically insured by government agencies like the FDIC (Federal Deposit Insurance Corporation) in the United States, which provides a level of protection up to a certain limit in case of bank failure.
or Want to Sign up with your social account?