Since our income receipts and expenditures do not coincide, we hold money to bridge the gap. The amount of money held to finance expenditures is called the transactions demand for money.
Individuals also hold money as an asset.
Although money earns no nominal return, it is less risky than most interest bearing assets. Individuals choose to hold money as an asset to reduce the overall risk of their financial portfolios. Since the opportunity cost of holding money is the forgone interest from an alternative asset, the quantity of money held as an asset is negatively related to the nominal interest rate. Some of the other variables that affect the demand for money are income and the price level. Money demand is positively related to both of these variables.