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Saving

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Saving is a fundamental economic concept involving income that is not spent immediately. It is often described as deferred consumption. In a broader economic sense, saving is any income not used for immediate consumption. This process also includes reducing recurring expenditures to keep more resources. People use various methods to save their money. Common methods include savings accounts, pension accounts, or investment funds. Some people also choose to keep their money as cash.

Personal savings
Personal savings

It is important to distinguish between the terms "saving" and "savings." Economists view these as two different types of variables. Saving is a flow variable, which means it is an activity occurring over time. Savings is a stock variable, which refers to assets that exist at any one time. For example, your monthly habit of setting aside money is saving. The total amount of cash in your bank is your savings. Even professional economists and investment professionals often confuse these two terms.

In the world of personal finance, saving focuses on low-risk preservation. This means the goal is to keep the money safe for future needs. Common uses for saved money include emergency funds or large purchases like cars. People also save for vacations or to pay future tax bills. In the United States, banks provide deposit insurance through the FDIC. The Federal Deposit Insurance Corporation helps prevent people from losing money if a bank fails. This protection was especially important after the losses seen during the Great Depression.

Personal saving is different from investing due to the level of risk involved. Investing involves buying assets like stocks or investment funds. These assets may increase in value, but they also carry capital risk. A capital loss can occur if the market value of an investment falls. Banks sometimes use the word "investment" for deposit accounts to help with marketing. However, a good rule of thumb is to look at the risk. If money is kept in cash, it is considered savings. If it is used to buy assets that fluctuate in value, it is an investment.

On a larger scale, saving is closely linked to physical investment. By not spending income on consumer goods, resources can be used for fixed capital. Fixed capital includes things like factories and machinery. This process is vital for increasing economic growth. When people save, they provide the funds necessary for businesses to invest. However, this only works if savings are placed in a financial intermediary like a bank. If money is not deposited, it cannot be recycled into business investment.

If saving exceeds investment, it can cause economic problems. A shortfall of demand might occur if money is not being recycled. This can lead to a pile-up of inventories and a cut-back in production. Such a situation can cause a recession, where employment and income drop. Classical economics suggested that interest rates would adjust to balance saving and investment. This theory argued that higher saving would lower interest rates and stimulate investment. However, the economist John Maynard Keynes argued that saving and investment are not very responsive to interest rates. He believed that saving could exceed investment for long periods, causing a general glut.

History shows that saving has always been a tool for survival. In primitive agricultural economies, saving was a matter of food security. Farmers would hold back the best corn from their harvest. They used this as seed corn for the next planting season. If the entire crop was consumed, the economy would have to shift to hunting and gathering.

This shows that the choice to forego present consumption is what enables future growth. In modern economics, the fraction of income saved is called the average propensity to save. The fraction of an increase in income that is saved is the marginal propensity to save.

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