Saving

Saving is the portion of income that is not spent, or consumption that is postponed. In economics, it more broadly refers to any income not used for immediate consumption, and it also includes cutting back on expenses like recurring costs. People can save by putting money into a savings account, a pension account, an investment fund, or by holding it as cash. In personal finance, saving typically means low-risk preservation of money, such as in a deposit account, as opposed to investment, which carries much higher risk. Saving does not necessarily earn interest.

Saving and savings are not the same thing. Saving is the act of not consuming assets over time—a flow variable—while savings refers to assets held as cash at a single point in time—a stock variable. This distinction is often confused, and even professional economists and investment experts frequently use "saving" to mean "savings." What counts as saving can vary by context. For instance, mortgage principal repayments are not spent on present consumption, so they qualify as saving by the definition, even though people rarely think of loan repayment that way. However, in U.S. National Income and Product Accounts, personal interest payments are only treated as saving if the recipients save them.

Saving is closely tied to physical investment, as it provides funds for that investment. By not spending income on consumer goods and services, resources can instead be used to produce fixed capital, like factories and machinery. This makes saving vital for increasing fixed capital and contributing to economic growth. Yet, more saving does not always mean more investment. If savings are not deposited into a financial intermediary like a bank, they cannot be recycled as business investment. This can lead to a shortfall in demand, causing inventory pile-ups, production cuts, job losses, and a recession, rather than growth. In the short term, if saving falls below investment, it can boost aggregate demand and create an economic boom. Over the long term, however, if saving stays below investment, it eventually reduces investment and harms future growth. Savings not placed in a financial intermediary effectively become an interest-free loan to the government or central bank, which can then recycle the funds.

In a primitive agricultural economy, saving might mean holding back the best corn harvest as seed for the next planting season. If the entire crop were consumed, the economy would have to switch to hunting and gathering the following year.

Classical economics held that interest rates would adjust to keep saving and investment equal, preventing inventory gluts. A rise in saving would lower interest rates, spurring investment, so the two would always match. John Maynard Keynes, however, argued that neither saving nor investment responds much to interest rates—both are interest-inelastic—so large rate changes would be needed to rebalance them. He also believed that the demand for and supply of money determine short-term interest rates. Consequently, saving could exceed investment for long periods, causing a general glut and recession.

In personal finance, saving means preserving money in nominal terms for future use. A savings account that pays interest is typically used for future needs like an emergency fund, a major purchase (car, house, vacation), or to give to someone else (children, tax bill). Cash savings accounts are considered very low risk. In the United States, banks must have deposit insurance, usually from the Federal Deposit Insurance Corporation (FDIC). Bank failures could cause deposit losses, as happened at the start of the Great Depression, but the FDIC has prevented that since. Money used to buy stocks, invest in a fund, or purchase any asset with capital risk is considered an investment. This distinction matters because investment risk can lead to capital loss when the asset is sold, unlike cash savings. The terms saving and investment are often used interchangeably; for example, banks may market deposit accounts as investment accounts. As a rule, if money is "invested" in cash, it is savings. If it is used to buy an asset expected to increase in value over time but subject to market fluctuations, it is an investment.

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