Near Money

Key takeaways
* Near money (cash equivalents, quasi‑money) are non‑cash assets that are highly liquid and easily convertible to cash.
* Near money helps measure liquidity for individuals, businesses, and central banks.
* Central banks classify money supply into tiers (commonly M1 and M2), with near money included in M2.

What is near money?

Near money refers to assets that are not cash but can be converted to cash quickly and with minimal loss of value. The “nearness” of an asset is determined by how long conversion takes and any costs or penalties involved. Near money is used to assess liquidity — how readily funds are available to meet obligations or take advantage of opportunities.

Common examples

• Savings accounts and high‑yield savings
• Money market accounts and retail money market funds
• Short‑term certificates of deposit (CDs)
• Treasury bills and other short‑term government debt
• Marketable securities and certain short‑term investments
• Foreign currencies held in liquid form

Which assets count as near money depends on the analysis and the acceptable conversion time horizon.

Near money in personal wealth management

Near money plays a central role in cash management and risk planning:
* Conservative savers prioritize very liquid, low‑risk near money (e.g., savings, short CDs, T‑bills) even though returns are modest.
* Investors with larger cash cushions may accept longer conversion horizons (longer‑term CDs, time deposits) for higher yield.
* Stocks can be functionally near money because they are convertible in days, but price volatility makes them less reliable for immediate cash needs.

Corporate liquidity and financial ratios

Companies use near money in liquidity analysis and to ensure short‑term obligations can be met:
* Quick ratio: (cash + marketable securities + accounts receivable) ÷ current liabilities. Focuses on the most liquid assets (often those convertible within about 90 days).
* Current ratio: current assets ÷ current liabilities. Measures liquidity over a one‑year horizon and includes less liquid current assets.

Higher ratios generally indicate stronger ability to cover short‑term liabilities.

Near money and the money supply

Economists and central banks classify money into tiers based on liquidity:
* M1 (narrow money): currency, coins, demand deposits, and checking accounts — primarily true money used for transactions.
* M2: includes everything in M1 plus near money such as savings deposits, retail money market funds, and small time deposits.

Central banks influence these aggregates via tools like open market operations, interest‑rate policy, and reserve requirements. The composition and size of M1 and M2 matter for monetary policy and liquidity analysis.

Money vs. near money

• Money: immediately available cash used as a medium of exchange (on demand).
• Near money: assets that require some time or minor cost to convert into cash.

Both are important: cash for meeting immediate obligations, near money for short‑term liquidity planning and as a buffer against unexpected needs.

Why it matters

Understanding near money helps households, businesses, and policymakers gauge liquidity risk, allocate assets appropriately, and make informed decisions about cash management and monetary policy.