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The income not spent on consumption is defined as saving. Saving is the act of not consuming all of one’s current income. Whatever is not consumed out of disposable income is by definition saving.

Formula or Equation:

The economy’s saving equation is:

Saving = Disposable Income – Consumption

Causes or Reasons:

There are several causes or reasons (motives) which induce people to save. They can be grouped under two headings:

(i) Power to save, (ii) Will to save.

(1) Power to Save:

Power to save depends upon the level of income which a person earns. In case of a nation, power to save depends on proper utilization of natural resources. It is because when the income is low, then almost the whole amount is spent on meeting the bare necessities of life. So saving is very nominal. But in case of high income, one can save if he likes because he has got the surplus income over consumption.

(2) Will to Save:

The willingness to save is influenced by subjective and objective considerations, which are as under:

(a) Subjective Considerations:

(i) Foresight: People save money as a provision against some unforeseen circumstances which might arise in the future. A few other accumulate wealth for their dependants. All these prudential considerations can be constituted under the heading foresight.

(ii) Social and political considerations: Wealth gives power over other men in the economic sphere and also political and social influence. The desire of prestige, power and respect in social sphere and political life actuates human being to save.

(iii) Temperamental considerations: There are a few persons who save neither for their families nor for their own use but merely because they have acquired a short of mania for accumulation of wealth for its own sake.

(b) Objective Consideration:

(i) Security of life property: If there is security of life and property in a country, the saving is encouraged.

(ii) Facilities for investment: If facilities of profitable investment are available, then saving is stimulated.

(iii) Monetary stability: Monetary stability also plays a very important part in the value of money, then saving is discouraged and if the value of money is expected to rise, the saving is encouraged.

(iv) Saving and the rate of interest: It is one the very important factors which exercises influences on the volume of saving. If the rate of interest is high, it generally induces people to save more money and if it is low, the saving is discouraged. However, there will of course be a few people who will try to save more when the interest rate is low save less when the interest rate is high just to provide for themselves a certain annual income for their old age of for their dependants.

For example, a man wishes to have an annual income of $2,000 after retirement. If we suppose the annual rate of interest is 10% then he has to save $20,000, to get an income of $2,000. If the rate of interest falls down to 5% then he has to save $40,000 to get the desired sum of $2,000.

There will of course be many people who will go on saving whatever the rate of interest. On the whole what we can say is that saving encouraged when the interest rate is high and discouraged when it is low.