What is the significance of holding cash for emergency situations?

The significance of holding cash for emergency situations is most accurately represented by the transactional motive. This refers to the need to have liquid assets available for day-to-day transactions or unexpected expenses, allowing individuals or businesses to act quickly when needed. Holding cash ensures that one can cover immediate costs, such as medical emergencies or urgent repairs, without having to liquidate investments, which might take time or incur penalties.

Keeping cash readily available serves a practical purpose in financial planning, providing a buffer in times of uncertainty or unexpected events. This aligns with the transactional motive for holding cash, as it enables individuals to manage their financial commitments without jeopardizing their financial stability.