Near money, sometimes referred to as quasi-money or cash equivalents, describes non-cash assets that are highly liquid and easily converted to cash.
Key Takeaways
- Near money refers to non-cash assets that can be easily converted to cash.
- Financial analysts view near money as an important concept for testing liquidity.
- Central banks utilize the concept of near money in classifying assets as either M1, M2, or M3.
Understanding Near Money
Near money is a term that analysts use to understand and quantify the liquidity of financial assets. Understanding near money is essential in corporate financial statement analysis and money supply management. Near money provides a barometer for cash liquidity, cash equivalents conversion, and risk management.
Near money and near moneys have influenced financial analysis and economic considerations for decades. The nearness of near moneys classifies assets into M1, M2, or M3.
Near moneys refer to an entity’s near money comprehensively. The nearness varies depending on the actual time frames to cash conversion and may include transactional fees or penalties.
Examples of near money assets include savings accounts, certificates of deposit (CDs), foreign currencies, money market accounts, marketable securities, and Treasury bills (T-bills). The assets included in near money analysis vary depending on the analysis type.
Personal Wealth Management
In personal wealth management, near money can influence an investor’s risk tolerance. Near money includes assets that an investor can easily convert to cash within a short period. Investors prioritizing high liquidity will choose low-risk, short-term options like high-yield savings accounts, money market accounts, six-month CDs, and T-bills, offering low returns with minimal risk.
Investors with substantial cash reserves might opt for longer-maturity assets with higher returns, such as two-year CDs. Higher-risk options like stocks can be quickly converted to cash but carry higher volatility and risk.
Corporate Liquidity
The concept of near money is crucial in business financial statement analysis, especially in balance sheet liquidity analysis through the quick ratio and the current ratio.
Quick Ratio
The quick ratio examines assets with the shortest nearness, usually 90 days, including cash equivalents, marketable securities, and accounts receivable. This ratio shows the coverage level of a company’s most liquid assets to its current liabilities.
Current Ratio
The current ratio pushes slightly farther with assets convertible to cash within one year. It examines the company’s liquidity over a one-year horizon by dividing all current assets by current liabilities.
The Money Supply
Economists break down near money assets into tiers: M1, M2, and M3. These tiers reflect the nearness of conversion into cash.
- M1: Includes cash, coins, demand deposits, and checking account assets.
- M2: Includes everything in M1, plus savings deposits, time deposits under $100,000, and retail money market funds.
- M3: Includes M1 and M2, plus longer-term and larger time deposits, as well as institutional money market funds.
In the U.S., the Federal Reserve primarily uses M1 and M2 statistics for policy considerations. Near money is part of the M2 money supply.
Money vs. Near Money
The distinction between money and near money is vital. Money includes cash in hand or the bank for immediate use in transactions. Near money requires some time for conversion to cash.
Both individuals and businesses need cash for immediate obligations. Real money primarily composes the M1 category, while near money features assets easily convertible to cash.
The realm of near money assets varies depending on the analysis, and its nearness must be considered in all types of financial decisions.
Related Terms: cash equivalents, liquidity, financial assets, money supply, financial statement analysis.
