A motive for holding money which arises out of the possibility of unforeseen or imperfectly anticipated needs for expenditure. A need for money which can only be met by seiling some non-money form of wealth, e.g. a share or a bond, may involve the holder in a loss, perhaps because of unfavourable market conditions, cost penalties or transactions costs. Alternatively, it may involve borrowing and thus incurring interest costs. Hence, given that future needs for money cannot be predicted with complete certainty, some margin over the most likely required money sum will have to be held. This part of the individual’s money holding then arises out of a precautionary motive.
Reference: The Penguin Dictionary of Economics, 3rd edt.