Precautionary Demand for Money:

The Precautionary demand for money by individuals and firms arises out of the need for any contingent payments/expenditures for covering events of a more uncertain nature like accidents, prolonged illness, and sudden change in technology forcing firms to replace machinery to stay competitive. Like the transactions demand for money, Precautionary demand for money is also closely and positively related to the level of income.  Thus, the Precautionary demand for money is also a function of level of Y: 

Keynes aggregated the transactionary demand for money and precautionary demand for money together and argued that these two are a stable function of level of national income (nominal).  The rate of interest as an important determinant of the demand for money function enters through the third motive:  the speculative demand for money.