What Is Near Money?
Near money is a term for highly-liquid assets that are quickly and easily converted into cash. They may also be referred to as cash equivalents.
Examples of Near Money
Examples of near money investments are interest-bearing savings accounts, certificates of deposit, money market accounts, marketable securities, short-term U.S. government debt, and some foreign currencies. Any marketable security such as common stock as well as corporate, government or municipal bonds is also highly liquid, but, depending on its volatility, may or may not be a reliable source of liquidity.
How Does Near Money Work?
While the concept of near money is important in liquidity analysis for individual investors, it also plays an important role on a macro level for economists, central bankers, and other analysts to determine money supply and overall systemic monetary health. In the U.S., near money is used to help determine different measures of money supply.
The Three Tiers of Near Money
Near money can be found in the three tiers of the U.S. money supply: M1, M2, and M3.
- M1 represents all actual, available cash (including coins and currency).
- M2 represents all of M1 plus all demand deposits and checking accounts.
- M3 includes M1 and M2 tiers, as well as longer-term and larger value time deposits like certificates of deposit (CD) and institutional money market funds.
What Is the Difference Between Money and Near Money?
Money is best described as physical cash on hand (or in a checking or passbook savings account). It can instantly be accessed and spent. Near money, however, is a liquid asset that can be liquidated quickly. Once converted to cash, it can then be spent.
Are Credit Cards Near Money?
While credit cards can serve as a means of purchase or provide access to a cash advance, but they would not be considered near money. The primary reason is that credit cards – while capable of providing perceived liquidity – are a revolving liability or debt.
Near Money and Personal Wealth Management
For an individual investor level, near money is useful as an indicator of risk tolerance. An individual with an extremely high level of conservative, near money choices would have a low tolerance for loss and volatility.
A more aggressive investor, however, may have a higher percentage of near money allocated to stocks. While highly-liquid and qualifying as near money, they are subject to greater volatility and risk.
Near Money and Corporate Finance
Near money can be applied to the analysis of corporate finance and liquidity. On a company’s balance sheet, the level of liquidity and near money accessibility is shown in the quick ratio.
The quick ratio measures the “most near” (most accessible) liquidity by comparing its most liquid assets to its current liabilities.
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