Saving
Saving is income not spent, or deferred consumption.
Saving is income not spent, or deferred consumption. In economics, a broader definition is any income not used for immediate consumption. Saving also involves reducing expenditures, such as recurring costs. Methods of saving include putting money in, for example, a savings account, a pension account, an investment fund, or kept as cash. In terms of personal finance, saving generally specifies low-risk preservation of money, as in a deposit account, versus investment, wherein risk is a lot higher. Saving does not automatically include interest.
- definition
- Income not spent, or deferred consumption
- key_distinction
- Saving (flow variable) vs. savings (stock variable)
- related_concept
- Physical investment, but not always corresponding
- personal_finance_risk
- Low-risk preservation of money
- economic_measure
- After-tax income minus consumption
- key_rates
- Average propensity to save; marginal propensity to save
Lore & Background
Saving differs from savings. The former refers to the act of not consuming one's assets, whereas the latter refers to either multiple opportunities to reduce costs; or one's assets in the form of cash. Saving refers to an activity occurring over time, a flow variable, whereas savings refers to something that exists at any one time, a stock variable. This distinction is often misunderstood, and even professional economists and investment professionals will often refer to 'saving' as 'savings'. In different contexts there can be subtle differences in what counts as saving. For example, the part of a person's income that is spent on mortgage loan principal repayments is not spent on present consumption and is therefore saving by the above definition, even though people do not always think of repaying a loan as saving. However, in the U.S. National Income and Product Accounts (NIPA), personal interest payments are treated as consumption or transfers, not as saving, regardless of whether the recipients save them. Saving is closely related to physical investment, in that the former provides a source of funds for the latter. By not using income to buy consumer goods and services, it is possible for resources to instead be invested by being used to produce fixed capital, such as factories and machinery. Saving can therefore be vital to increase the amount of fixed capital available, which contributes to economic growth.
Reader's Guide
Saving is a fundamental economic concept with significant implications for personal finance and macroeconomic growth. In personal finance, saving is distinguished from investment by its low-risk nature, typically involving cash or deposit accounts, while investment involves capital risk. The distinction between saving (a flow) and savings (a stock) is often confused even by professionals. Economically, saving provides funds for physical investment, but increased saving does not always lead to increased investment if not channeled through financial intermediaries. Classical economics held that interest rates would equilibrate saving and investment, but John Maynard Keynes argued that both are interest-inelastic, allowing saving to exceed investment for significant periods, potentially causing recessions. The rate of saving is directly affected by interest rates, and capital markets equilibrate personal saving, government surpluses, and net exports to physical investment. Understanding saving is crucial for analyzing economic growth, as foregoing present consumption to increase investment enables future growth, though short-term imbalances can lead to booms or recessions.
Did You Know?
- Saving does not automatically include interest.
- Saving is a flow variable, while savings is a stock variable.
- Mortgage principal repayments count as saving even though people do not always think of repaying a loan as saving.
- Savings can be directly invested via stocks, bonds, or non-bank financial institutions, not just through a financial intermediary.
Frequently Asked Questions
What does 'Saving' mean in labor & employment economics?
Saving refers to the portion of a worker's or household's income that is set aside rather than used for current spending. In economic terms, it is calculated as after-tax income minus consumption, representing deferred consumption.
What's the difference between 'saving' and 'savings'?
Saving is a flow variable measuring how much income is set aside over a given period, while savings is a stock variable representing the accumulated total at a particular point in time.
How does saving differ from investing in personal finance?
Saving is generally understood as low-risk preservation of funds, such as holding them in a deposit or savings account. Investing, by contrast, involves taking on substantially higher risk in pursuit of greater returns.
How do economists measure saving behavior?
Economists track saving through two key rates: the average propensity to save (total saving divided by total income) and the marginal propensity to save (the fraction of each additional dollar of income that is saved).
Does putting money in a savings account count as saving even if it earns no interest?
Yes—saving does not require the funds to generate interest. The act of setting aside income rather than spending it constitutes saving, regardless of whether the account pays any return.
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