Key takeaways
– Near money (quasi‑money or cash equivalents) are non‑cash assets that are highly liquid and can be converted to cash with little loss of principal.
– Typical examples: savings accounts, money‑market funds, short‑term Treasury bills, marketable securities, and short‑term CDs.
– Near money sits on a liquidity spectrum: shorter maturities and lower withdrawal costs = nearer to cash.
– Investors and companies use near money to meet short‑term needs and to manage risk; central banks treat near money as part of broader money aggregates (M2 in the U.S.).
– Measure corporate liquidity with the quick ratio (very near money) and the current ratio (nearer‑term assets up to one year).
What is “near money”?
Near money refers to financial assets that are not cash but can be converted to cash quickly and with minimal loss. The core idea is “nearness” to cash: how long and how costly it is to turn an asset into spendable cash. The nearness varies by instrument (a high‑yield savings account vs. a two‑year CD), market conditions, brokerage or bank processing times, and any withdrawal penalties.
Common examples
– Cash and demand deposits (these are true money, not near money)
– Savings accounts and high‑yield savings accounts
– Money‑market deposit accounts and money‑market funds
– Short‑term Treasury bills (T‑bills)
– Short‑term certificates of deposit (CDs) — the nearer the maturity, the nearer the asset
– Marketable securities (highly liquid stocks and bonds)
– Foreign currency holdings (convertible quickly depending on market liquidity)
Money vs. near money
– Money: cash or funds available on demand that can be used immediately for transactions. In U.S. aggregates, this is mainly represented in M1 (currency in circulation, demand deposits, checkable deposits).
– Near money: assets that require conversion (time or transaction) before they become spendable cash; typically counted in broader aggregates such as M2.
– Practical distinction: if you need cash right now, you rely on money; if you can wait days or accept a small penalty, near money may be acceptable and can earn a return.
Near money and the money supply (policy context)
– Central banks and statisticians divide money into tiers (M1, M2, historically M3) to monitor liquidity in the economy. Near money is generally part of M2 (M1 + savings deposits, small time deposits, and retail money‑market funds).
– The Federal Reserve monitors M1 and M2 for policy analysis. Changes in near‑money aggregates can influence monetary policy decisions.
– The Fed has three main policy levers that affect these aggregates: open‑market operations, the federal funds rate (interest rates), and reserve requirements.
Measuring liquidity: practical ratios for businesses
– Quick ratio (acid‑test): a conservative measure using the most liquid assets.
Formula: Quick ratio = (Cash + Marketable securities + Accounts receivable) / Current liabilities
Example: Cash $50k + Marketable securities $30k + AR $20k = $100k; Current liabilities $80k → Quick ratio = 100 / 80 = 1.25.
– Current ratio: broader one‑year horizon.
Formula: Current ratio = Current assets / Current liabilities
Example: Add inventory $40k to the previous assets → Current assets $140k; Current liabilities $80k → Current ratio = 140 / 80 = 1.75.
– Targets vary by industry; a “good” ratio depends on working‑capital cycles and business risk.
Practical steps — Individuals and investors
1. Determine liquidity needs
– Calculate an emergency fund (commonly 3–6 months of living expenses; more if you have irregular income or higher risk exposure).
2. Allocate a liquidity ladder
– Keep immediate cash for day‑to‑day needs (checking account).
– Put 1–3 months’ reserves in a high‑yield savings or money‑market account (very near money).
– Stagger (ladder) CDs or T‑bills for future cash needs to balance yield and access (e.g., 3‑, 6‑, 12‑month maturities).
3. Match instrument to time horizon
– Short horizon (days–weeks): checking, savings, money‑market funds.
– Medium horizon (weeks–months): short‑term T‑bills, short CDs (consider early‑withdrawal penalties).
– Longer horizon (years): longer CDs, bonds, equities (liquid but volatile).
4. Account for conversion costs & settlement
– Brokerage sales require trade execution and settlement (subject to market liquidity and short settlement windows).
– CDs and some retirement accounts can impose penalties or tax consequences if withdrawn early.
5. Revisit periodically
– Rebalance as life changes (job, family, large purchases) or when market rates shift.
Practical steps — Businesses and treasuries
1. Build a rolling cash forecast (daily/weekly for short terms; monthly quarterly for longer).
2. Maintain a minimum liquidity buffer expressed in days of operating expenses.
3. Use a tiered liquidity policy:
– Tier 1: cash and overnight bank deposits for immediate needs.
– Tier 2: money‑market funds and short T‑bills for next‑day to 30‑day needs.
– Tier 3: short‑term marketable securities and near‑maturity CDs for 30–365 day needs.
4. Monitor quick ratio and current ratio and set internal minimums by business unit.
5. Arrange contingent lines of credit and bank facilities for rare liquidity stress.
6. Use sweep accounts and cash pooling to concentrate idle cash and improve internal liquidity.
7. Consider counterparty and market risk (e.g., money market funds, foreign currency liquidity).
Policy and macro implications
– Movements in near money (M2) can signal shifts in savings behavior, bank deposit flows, or the public’s preference between cash and interest‑bearing accounts—information central banks use when setting policy.
– Large, rapid changes in near money holdings can affect credit conditions and inflation expectations.
– Analysts and policymakers watch M2 levels, composition, and growth rates as one input among many when assessing monetary stimulus or tightening.
Risks and limitations
– Liquidity is not binary: converting an asset to cash can produce price risk in stressed markets (marketable securities may be liquid in normal times but not in crises).
– Withdrawal penalties, early‑redemption fees, and tax consequences reduce effective liquidity.
– Classification is context dependent: what counts as “near money” for an individual may differ from a bank regulator’s view (institutional investors use other measures).
– Aggregate measures (M2) are only one indicator; policy decisions use many data points.
Checklist: how to evaluate a near‑money instrument
– How quickly can it be converted to cash? (immediate, days, weeks, months)
– What are settlement times or notice periods?
– Are there penalties or transaction fees on conversion?
– What is the principal risk (credit risk, price volatility)?
– What is the expected yield relative to competing near‑money options?
– How does it fit your cash flow and time horizon?
Conclusion
Near money sits between cash and longer‑term investments and plays a central role in personal finance, corporate treasury management, and macroeconomic analysis. The appropriate use of near money balances liquidity needs against yield and risk. For individuals and companies, clear forecasts, tiered liquidity planning, and awareness of conversion costs are the practical core of managing near‑money assets. For policymakers, near money aggregates (M2) inform—but do not solely determine—monetary policy decisions.
Sources
– Investopedia. “Near Money.” https://www.investopedia.com/terms/n/near-money.asp
– Board of Governors of the Federal Reserve System. “What Is the Money Supply? Is It Important?” https://www.federalreserve.gov/faqs/money_12845.htm
– Board of Governors of the Federal Reserve System. “Monetary Policy: What Are Its Goals? How Does It Work?” https://www.federalreserve.gov/monetarypolicy.htm
– Board of Governors of the Federal Reserve System. “How Does the Federal Reserve Control the Supply of Money?” https://www.federalreserve.gov/faqs/what-are-the-primary-tools-of-monetary-policy.htm
– Federal Reserve System. “Discontinuance of M3.” https://www.federalreserve.gov/releases/h6/hist/h6hist3.htm
– Federal Reserve Bank of St. Louis. “M2 Monetary Aggregate.” https://fred.stlouisfed.org/series/M2SL
If you’d like, I can:
– Create a sample liquidity ladder for a household with specified income and expenses, or
– Produce a corporate cash‑management policy template with suggested targets for quick and current ratios. Which would help you more?