Saving is

income Income is the consumption and saving opportunity gained by an entity within a specified timeframe, which is generally expressed in monetary terms. Income is difficult to define conceptually and the definition may be different across fields. For ...

not spent, or deferred

consumption Consumption may refer to: *Resource consumption *Tuberculosis, an infectious disease, historically * Consumption (ecology), receipt of energy by consuming other organisms * Consumption (economics), the purchasing of newly produced goods for curren ...

. Methods of saving include putting money aside in, for example, a

deposit account A deposit account is a bank account maintained by a financial institution in which a customer can deposit and withdraw money. Deposit accounts can be savings accounts, current accounts or any of several other types of accounts explained below. ...

, a pension account, an

investment fund An investment fund is a way of investing money alongside other investors in order to benefit from the inherent advantages of working as part of a group such as reducing the risks of the investment by a significant percentage. These advantages inc ...

, or as

cash In economics, cash is money in the physical form of currency, such as banknotes and coins. In bookkeeping and financial accounting, cash is current assets comprising currency or currency equivalents that can be accessed immediately or near-imm ...

. Saving also involves reducing expenditures, such as recurring

cost In production, research, retail, and accounting, a cost is the value of money that has been used up to produce something or deliver a service, and hence is not available for use anymore. In business, the cost may be one of acquisition, in which ...

s. In terms of

personal finance Personal finance is the financial management which an individual or a family unit performs to budget, save, and spend monetary resources over time, taking into account various financial risks and future life events. When planning personal fi ...

, saving generally specifies low-risk preservation of money, as in a

, versus

investment Investment is the dedication of money to purchase of an asset to attain an increase in value over a period of time. Investment requires a sacrifice of some present asset, such as time, money, or effort. In finance, the purpose of investing i ...

, wherein risk is a lot higher; in

economics Economics () is the social science that studies the Production (economics), production, distribution (economics), distribution, and Consumption (economics), consumption of goods and services. Economics focuses on the behaviour and intera ...

more broadly, it refers to any income not used for immediate consumption. Saving does not automatically include interest. ''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 In finance, stock (also capital stock) consists of all the shares by which ownership of a corporation or company is divided.Longman Business English Dictionary: "stock - ''especially AmE'' one of the shares into which ownership of a company ...

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 A mortgage loan or simply mortgage (), in civil law jurisdicions known also as a hypothec loan, is a loan used either by purchasers of real property to raise funds to buy real estate, or by existing property owners to raise funds for any p ...

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. measurement of the numbers behind its

gross national product The gross national income (GNI), previously known as gross national product (GNP), is the total domestic and foreign output claimed by residents of a country, consisting of gross domestic product (GDP), plus factor incomes earned by foreign ...

(i.e., the

National Income and Product Accounts The national income and product accounts (NIPA) are part of the national accounts of the United States. They are produced by the Bureau of Economic Analysis of the Department of Commerce. They are one of the main sources of data on general econ ...

), personal interest payments are not treated as "saving" unless the institutions and people who receive them save them. Saving is closely related to physical

, 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 In accounting, fixed capital is any kind of real, physical asset that is used repeatedly in the production of a product. In economics, fixed capital is a type of capital good that as a real, physical asset is used as a means of production which i ...

, such as factories and machinery. Saving can therefore be vital to increase the amount of fixed capital available, which contributes to

economic growth Economic growth can be defined as the increase or improvement in the inflation-adjusted market value of the goods and services produced by an economy in a financial year. Statisticians conventionally measure such growth as the percent rate of ...

. However, increased saving does not always correspond to increased

. If savings are not deposited into a financial intermediary such as a

bank A bank is a financial institution that accepts deposits from the public and creates a demand deposit while simultaneously making loans. Lending activities can be directly performed by the bank or indirectly through capital markets. Because ...

, there is no chance for those savings to be recycled as investment by business. This means that saving may increase without increasing investment, possibly causing a short-fall of demand (a pile-up of inventories, a cut-back of production, employment, and income, and thus a

recession In economics, a recession is a business cycle contraction when there is a general decline in economic activity. Recessions generally occur when there is a widespread drop in spending (an adverse demand shock). This may be triggered by various ...

) rather than to economic growth. In the short term, if saving falls below investment, it can lead to a growth of

aggregate demand In macroeconomics, aggregate demand (AD) or domestic final demand (DFD) is the total demand for final goods and services in an economy at a given time. It is often called effective demand, though at other times this term is distinguished. This is ...

and an economic boom. In the long term if saving falls below investment it eventually reduces investment and detracts from future growth. Future growth is made possible by foregoing present consumption to increase investment. However, savings not deposited into a financial intermediary amount to an (interest-free) loan to the government or central bank, who can recycle this loan. In a primitive agricultural economy, savings might take the form of holding back the best of the corn harvest as seed corn for the next planting season. If the whole crop were consumed the economy would convert to hunting and gathering the next season.

Interest rates

Classical economics Classical economics, classical political economy, or Smithian economics is a school of thought in political economy that flourished, primarily in Britain, in the late 18th and early-to-mid 19th century. Its main thinkers are held to be Adam Smith ...

posited that

interest rates An interest rate is the amount of interest due per period, as a proportion of the amount lent, deposited, or borrowed (called the principal sum). The total interest on an amount lent or borrowed depends on the principal sum, the interest rate, th ...

would adjust to equate saving and investment, avoiding a pile-up of inventories (general

overproduction In economics, overproduction, oversupply, excess of supply or glut refers to excess of supply over demand of products being offered to the market. This leads to lower prices and/or unsold goods along with the possibility of unemployment. The de ...

). A rise in saving would cause a fall in interest rates, stimulating investment, hence always investment would equal saving. But

John Maynard Keynes John Maynard Keynes, 1st Baron Keynes, ( ; 5 June 1883 – 21 April 1946), was an English economist whose ideas fundamentally changed the theory and practice of macroeconomics and the economic policies of governments. Originally trained in ...

argued that neither saving nor investment was very responsive to interest rates (i.e., that both were interest-

inelastic In economics, elasticity measures the percentage change of one economic variable in response to a percentage change in another. If the price elasticity of the demand of something is -2, a 10% increase in price causes the demand quantity to fall b ...

) so that large interest rate changes were needed to re-equate them after one changed. Further, it was the demand for and supplies of stocks of

money Money is any item or verifiable record that is generally accepted as payment for goods and services and repayment of debts, such as taxes, in a particular country or socio-economic context. The primary functions which distinguish money are as ...

that determined interest rates in the short run. Thus, saving could exceed investment for significant amounts of time, causing a

general glut In macroeconomics, a general glut is an excess of supply in relation to demand, specifically, when there is more production in all fields of production in comparison with what resources are available to consume (purchase) said production. This exhi ...

and a recession.

Saving in personal finance

Within

, the act of ''saving'' corresponds to nominal ''preservation'' of money for future use. A

paying

interest In finance and economics, interest is payment from a borrower or deposit-taking financial institution to a lender or depositor of an amount above repayment of the principal sum (that is, the amount borrowed), at a particular rate. It is distinct ...

is typically used to hold money for future needs, ''i.e.'' an emergency fund, to make a capital purchase (car, house, vacation, etc.) or to give to someone else (children, tax bill etc.). Within personal finance, money used to purchase

s, put in an

or used to buy any asset where there is an element of capital risk is deemed an

. This distinction is important as the

investment risk Financial risk is any of various types of risk associated with financing, including financial transactions that include company loans in risk of default. Often it is understood to include only downside risk, meaning the potential for financial ...

can cause a capital loss when an investment is realized, unlike cash saving(s). Cash savings accounts are considered to have minimal risk. In the United States, all banks are required to have

deposit insurance Deposit insurance or deposit protection is a measure implemented in many countries to protect bank depositors, in full or in part, from losses caused by a bank's inability to pay its debts when due. Deposit insurance systems are one component of ...

, typically issued by the

Federal Deposit Insurance Corporation The Federal Deposit Insurance Corporation (FDIC) is one of two agencies that supply deposit insurance to depositors in American depository institutions, the other being the National Credit Union Administration, which regulates and insures cred ...

or FDIC. In extreme cases, a

bank failure A bank failure occurs when a bank is unable to meet its obligations to its depositors or other creditors because it has become insolvent or too illiquid to meet its liabilities. A bank usually fails economically when the market value of its assets ...

can cause deposits to be lost as it happened at the start of the

Great Depression The Great Depression (19291939) was an economic shock that impacted most countries across the world. It was a period of economic depression that became evident after a major fall in stock prices in the United States. The economic contagio ...

. The FDIC has prevented that from happening ever since. In many instances the terms saving and investment are used interchangeably. For example, many

s are labeled as ''investment accounts'' by banks for marketing purposes. As a rule of thumb, if money is "invested" in cash, then it is savings. If money is used to purchase some asset that is hoped to increase in value over time, but that may fluctuate in market value, then it is an investment.

Saving in economics

In economics, saving is defined as after tax

minus

. The fraction of income saved is called the

average propensity to save In Keynesian economics, the average propensity to save (APS), also known as the savings ratio, is the proportion of income which is saved, usually expressed for household savings as a fraction of total household disposable income (taxed income). ...

, while the fraction of an increment to income that is saved is called the

marginal propensity to save The marginal propensity to save (MPS) is the fraction of an increase in income that is not spent and instead used for saving. It is the slope of the line plotting saving against income. For example, if a household earns one extra dollar, and the ...

. The rate of saving is directly affected by the general level of

interest rate An interest rate is the amount of interest due per period, as a proportion of the amount lent, deposited, or borrowed (called the principal sum). The total interest on an amount lent or borrowed depends on the principal sum, the interest rate, th ...

s. The

capital market A capital market is a financial market in which long-term debt (over a year) or equity-backed securities are bought and sold, in contrast to a money market where short-term debt is bought and sold. Capital markets channel the wealth of savers t ...

s equilibrate the sum of (personal) saving,

government surplus A surplus store, military surplus store or disposals store in the Commonwealth of Nations sells items that are used, or purchased but unused, and no longer needed. The surplus is often military, government or industrial excess often called army-na ...

es, and

net export The balance of trade, commercial balance, or net exports (sometimes symbolized as NX), is the difference between the monetary value of a nation's exports and imports over a certain time period. Sometimes a distinction is made between a balance ...

s to physical

Notes

References

* Dell'Amore, Giordano (1983). "Household Propensity to Save", in Arnaldo Mauri (ed.), ''Mobilization of Household Savings, a Tool for Development'', Finafrica, Milan. * Modigliani, Franco (1988). "The Role of Intergenerational Transfers and the Life-cycle Saving in the Accumulation of Wealth", ''Journal of Economic Perspectives, n. 2, 1988.

Interest rates

Saving in personal finance

Saving in economics

See also

Notes

References

Further reading