What is Near Money?
Near money denotes assets that, while not classified as currency, possess the inherent capability for swift and seamless conversion into cash without significant loss of value. These assets, characterized by high liquidity, function as a depository of value but do not actively serve as a medium of exchange. Prominent examples of near money assets include savings accounts, certificates of deposit, money market funds, treasury bills, and short-term government bonds. The concept of near money holds significance in gauging both the money supply and the overall liquidity within an economy. It is alternatively referred to as quasi-money or cash equivalents.
Why Does Near Money Matter?
In the financial context, money includes commodities widely accepted as mediums of exchange for goods and services. Its classification is contingent upon liquidity, the measure of an asset's ease of conversion into cash without value depreciation. Within this framework, near money means assets of heightened liquidity, swiftly convertible into cash, including savings accounts, certificates of deposit, money market funds, treasury bills, and foreign currencies. While not constituting money per se, near money facilitates prompt and convenient conversion into currency as necessitated.
The significance of near money extends to its role in quantifying an economy's money supply, exerting influence on price levels, inflation, and overall economic activity. Furthermore, near money assumes importance in wealth management by enabling investors to optimize portfolios in alignment with risk tolerance and liquidity requirements. Typically characterized by modest returns, near money assets offer low risk and heightened security concurrently.
Differences Between Money and Near Money
Some of the differences between money and near money are:
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Money encompasses both physical currency and funds held in a bank account, which can be readily accessed and utilized to conduct financial transactions. It consists of coins, currency notes, and bank demand deposits. Money is the legal tender. Near money requires some time for cash conversion. It includes financial assets like bills of exchange, bonds, time deposits, shares, etc. Near money assets do not have similar legal status as money.
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Money has complete liquidity, meaning it is entirely liquid and can be easily used as a form of payment. On the other hand, near money does not possess full liquidity as it requires time and effort to convert it into actual money.
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Money functions as a unit of account and a standard measure of value, with all prices being denoted in monetary terms. Conversely, near money does not fulfill these roles; instead, its value is determined in relation to money.
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Money is directly used for making transactions. On the other hand, near money is an indirect medium of exchange; it has to be converted into ready money and then used for transactions.
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Money is not an income-yielding asset. On the contrary, near-money assets are income-yielding assets.