Saving (Economics)

Saving, in economics, is the part of income over a period that is not spent on consumption. A household that earns 5,000 in a month and spends 4,400 has saved 600, whether it keeps the money in a savings account, pays down a mortgage or buys shares. Firms save through retained profits, and governments save when tax revenue exceeds current spending.

Economists separate saving, a flow measured over a period, from savings, the stock of accumulated wealth built up by past saving. Saving is closely tied to investment: at the level of the whole economy, the funds that households, firms and governments set aside finance new machinery, buildings and infrastructure, either at home or abroad. The share of income saved is one of the most watched figures in macroeconomics because it shapes growth, interest rates and a country's external balance.

Think of income as a harvest. A farmer can eat all the grain this year or keep some back as seed. Eating it all is pleasant now, but keeping seed means a bigger harvest later. Saving is the seed corn of an economy: money not spent today that can be lent to someone who uses it to build something productive.

Saving also works as a cushion. A family with some money put aside can cope with a broken boiler or a lost job without borrowing at high cost. That is why people tend to save more when they feel uncertain, and why a sudden rush to save can slow an economy that depends on their spending.

For a household, saving is disposable income minus consumption, and the saving rate is that amount as a share of disposable income:

• $s$ is the saving rate.
• $Y_d$ is disposable income, after taxes and transfers.
• $C$ is consumption spending.

With disposable income of 50,000 and consumption of 46,000, saving is 4,000 and the saving rate is $4{,}000 \div 50{,}000 = 0.08$, or 8 percent. The US Bureau of Economic Analysis publishes a monthly personal saving rate on this basis, and the UK's Office for National Statistics publishes the household saving ratio. Rates differ sharply between countries: household saving has long been high in China and comparatively low in the United States and the United Kingdom. Saving rates spiked in many rich countries during the 2020 lockdowns, when spending opportunities disappeared while incomes were supported by governments.

National saving adds private saving and public saving (the government's budget surplus, or minus the deficit). In a closed economy national saving must equal investment. In an open economy the gap between the two is the current account balance:

If a country saves 25 percent of its income but invests only 20 percent, the extra 5 percent flows abroad and appears as a current-account surplus, as in Germany or China in many recent years. A country that invests more than it saves, such as the United States, runs a current account deficit and borrows from the rest of the world. This identity links household thrift and government borrowing to exchange rates and global capital flows, and underpinned the "global saving glut" explanation for low interest rates offered by Ben Bernanke in 2005.

Economists group saving motives into several kinds:

• Lifetime smoothing. The life-cycle hypothesis holds that people save while working to fund retirement, often through pension funds.
• Income smoothing. The permanent income hypothesis predicts that temporary windfalls are mostly saved.
• Precaution. The precautionary motive leads people to hold buffers against job loss or illness, especially where social insurance is thin.
• Returns. Higher interest rates reward saving, though the effect on total saving is ambiguous, because savers also need to set aside less to reach a given target.
• Bequests and big purchases. Some saving is meant for children, a home deposit or education.

Saving is usually seen as good for long-run growth, because it funds investment and builds capital. Keynes stressed a short-run complication known as the paradox of thrift: if everyone tries to save more at once, spending falls, incomes fall and total saving may not rise at all. This tension appears whenever governments urge households to spend during a downturn. Other debates concern whether tax incentives such as individual retirement accounts raise total saving or merely shift it between accounts, and whether low saving in some countries reflects choice, inadequate incomes or easy credit.

• U.S. Bureau of Economic Analysis: Personal Saving Rate