Different people have different spending habits. Some people can keep cash while other keep cash in other forms. In economics three motives explain the spending habits of an individual:
• Speculative motive
• Precautionary motive
• Transactive motive
People who reflect a speculative motive of money are those that keep cash in speculation that the prices of goods and services will go down in the future. They don’t don’t make investment speculative that the investment may cost less in the future. People who reflect a precaution motive of spending are those that hold cash in fear that unforeseen happenings might happen in the future that needs to be catered for. They hold money to honor future obligations that may arise. They are people who hold money in fear of things like diseases, inflation, and economic instability. Finally, people who reflect a transactive money motive are those that hold money for day to day transactions. They are people who never want to fall short of the minimum daily spending. These are reasons for keeping the cash.
To make investment
Investors know that investment opportunity is very rare and come one in a lifetime. For this reason, a serious investor will always have cash preserved for making investments. There are different types of investment that one can make. The main reason why people hold money to invest is to invest in high-risk high-return kind of investment. This is investments that include the purchase of share and securities. A company’s share will fluctuate depending on the economic condition of an economy. An investor will look forward to buying a share when they are selling at a low price at latter sell them when the prices increases. For this purpose, one has to be very ready with cash. Immediately the shares of a company drop, one will make buy the share.
To give out a loan
When one has more money than he can spend, he can give simple loans to friend and relatives. This is very common in family businesses. There is always that one person who is investment adverse and have a lot of cash in his belonging. The other members use this as a source of finance to meet current expenditure. The amount of loan given should be returned with interest. The interest is used to meet the transaction charges as well as making profits. Loans should only be given to trusted persons and should be used in an income generating project.
Meet future expenses
Expenses will always occur in the future. Future bills and obligation will need to be honored. One can hold money to meet the future bill. People say that tomorrow lives because of today. The future success depends on the amount of preparedness in the present days. One should be careful not to hold a lot of cash. In the event of inflation, the cash may lose value. One should observe prevailing economic conditions before keeping the cash. Cash can also be kept in other forms such as securities and current assets.…