Reasons (motives) for holding money

Business studies study module
  1. Transaction Motive:

Money is held with a motive of meeting daily expenses for both the firms and individuals. The demand for money for transaction purpose by individuals depends on the following factors:

  • Size/level of individual’s income: The higher the income of and individual, the more the number of transactions thus high demand for transactions.
  • Interval between pay days/ receipt of money: if the interval is long, then high amount of money will be held for transaction reasons.
  • Price of commodities: if the prices are high, the value of transactions will also increase thus more money balances required.
  • Individuals spending habits-people who spend a lot of money on luxuries will hold more money than those who only spend money on basics.
  • Availability of credit-people who have easy access to credit facilities hold little amount of money for daily transactions than those who do not have easy access to credit.

The transaction motive can further be divided to;

  • Income motive i.e. holding money to spend on personal/ family needs.
  • Business motive i.e. holding money to meet business recurring needs such as paying wages, postage, raw materials. Etc
  1. Precautionary Motive:

Money is held in order to be used during emergencies such as sicknesses.

The amount of money held for this motive will depend on the factors such as:

  • Level of income- the higher the income the higher the amount of money held for precautionary motive.
  • Family status- high class families tend to hold more money for precautionary motive than low class families.
  • Age of the individual- the aged tend to hold more money for precautionary motive than the young since they have more uncertainties than the young.
  • Number of dependant- the more the dependants one has, the more the money they are likely to hold for precautionary motive.
  • Individual’s temperament- pessimists tend to hold more money for precautionary motives than the optimists because they normally think things will go wrong.
  • Duration between incomes- those who earn money after a short time are likely to keep less money than those who earn money after a long time.
  1. Speculative Motive:

Money is held to be used in acquiring those assets whose values are prone to fluctuations such as shares/ money is held anticipating fall in prices of goods and services. This depends on the following:

  • The wealth of an individual
  • The rate of interest on government debt instruments
  • Interest on money balances held in the bank.
  • How optimistic or pessimistic a person is.

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