Saving

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. measurement of the numbers behind its gross national product (i.e., the National Income and Product Accounts), personal interest payments are not treated as 'saving' unless the institutions and people who receive them save them.

Reader's Guide

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. Within personal finance, the act of saving corresponds to nominal preservation of money for future use.

A savings account paying interest 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.). Cash savings accounts are considered to have minimal risk. In the United States, all banks are required to have deposit insurance, typically issued by the Federal Deposit Insurance Corporation or FDIC. In extreme cases, a bank failure can cause deposits to be lost as it happened at the start of the Great Depression.

The FDIC has prevented that from happening ever since. Within personal finance, money used to purchase stocks, put in an investment fund or used to buy any asset where there is an element of capital risk is deemed an investment. This distinction is important as the investment risk can cause a capital loss when an investment is realized, unlike cash saving(s).

In many instances the terms saving and investment are used interchangeably. For example, many deposit accounts 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.

In economics, saving is defined as after-tax income minus consumption. The fraction of income saved is called the average propensity to save, while the fraction of an increment to income that is saved is called the marginal propensity to save. The rate of saving is directly affected by the general level of interest rates. The capital markets equilibrate the sum of (personal) saving, government surpluses, and net exports to physical investment.