Concept of
Saving:
Definition of Saving:
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:
The
economy’s saving equation is:
Saving = Disposable Income -
Consumption
Motives of Saving:
There are several motives which induce people to save. They
can be groped 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:
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.
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 Jess 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.
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