Near Money

Published Apr 29, 2024

Definition of Near Money

Near money refers to assets that are not in the form of cash but can be easily converted into cash with little to no loss of value. These assets are highly liquid but not as liquid as cash itself, serving as a close substitute for cash in times of need. They include savings accounts, money market funds, and other short-term, highly liquid investment instruments.

Example

Consider the scenario of Alex, who keeps a portion of his savings in a money market account. While this account does not offer the instant accessibility of a checking account, it provides a higher rate of interest. Should Alex face an unexpected expense, he can quickly convert the funds from his money market account into cash, typically within a day or two, making it a near-money asset. This quick conversion ability offers him flexibility and security, as he can access his funds without significant delay or loss in value.
Certificates of Deposit (CDs) are another example of near money. They are time deposits with a fixed interest rate and maturity date. Although withdrawing funds before maturity may incur a penalty, CDs can be considered near-money assets due to their predictability and relatively high liquidity compared to long-term investments.

Why Near Money Matters

Near money plays a crucial role in personal finance and the broader economy. For individuals, near-money assets offer a balance between earning potential and liquidity, allowing for interest income while still providing access to funds in a pinch. Economically, the concept of near money is essential for understanding liquidity in the market. The availability of near-money assets affects consumer spending, saving decisions, and overall economic stability. During periods of financial uncertainty, people might prefer to hold more of their assets in near-money forms to ensure they can meet sudden expenditures without selling off long-term investments at a loss.

Frequently Asked Questions (FAQ)

How does near money differ from actual money?

Near money differs from actual money in its liquidity. While actual money (cash) is the most liquid asset and can be used immediately for transactions, near money requires a brief process to convert into cash and may, in some cases, incur a small cost. Despite this, near money remains highly liquid compared to other assets like real estate or stocks, which may take longer to sell and could fluctuate in value.

Why is liquidity important in financial planning?

Liquidity is vital in financial planning because it determines how quickly and efficiently an individual or business can meet immediate financial obligations without sustaining significant losses. Maintaining a mix of liquid assets and near-money allows for flexibility in handling unforeseen expenses, investment opportunities, or downturns in income. Proper liquidity management helps avoid the need to liquidate long-term investments under unfavorable conditions, thereby ensuring financial stability and growth.

Can near money be included in calculations of the money supply?

Near money is typically not included in the most narrow measures of the money supply, such as M1, which focuses on currency and demand deposits. However, broader measures of the money supply, like M2 and M3 (where applicable), encompass components of near money such as savings deposits, money market accounts, and other time deposits. These broader measures provide a more comprehensive view of the money available in the economy for spending and investment, acknowledging the role of near-money assets in economic liquidity.

What impact do changes in interest rates have on near-money assets?

Changes in interest rates can significantly affect the attractiveness and value of near-money assets. When interest rates rise, the return on near-money assets like savings accounts and money market funds typically increases, making them more appealing to savers. Conversely, when interest rates fall, these assets yield lower returns, which may prompt investors to seek higher returns in riskier assets. Therefore, interest rate fluctuations can influence where and how individuals choose to store their liquid assets, impacting the overall liquidity in the financial system.