- Saving is a part of income set aside or reserved for future use.
- It is a portion of current income not spent on consumption but reserved for future use. It is equal to income minus consumption (S = Y – C).
- It is excess of current income over current consumption.
The household or individual saves as well as the firm and government. The saving of the firm is referred to as ‘reserved, retained or undistributed profit’. While that of the government is called ‘reserved foreign exchange (reserved foreign currencies) or gold’.
Types of savings
- Personal savings: This refers to the type of savings kept by an individual for personal reasons.
- Corporate savings: This refers to the type of savings kept by companies and other business organisations. They embark on savings if profits are high, when taxation is low or for other critical reasons.
- Government savings: This refers to the type of savings kept by the government of a country. Government can save through budget surplus and many other ways.
Reasons for saving
The following are some of the reasons that propel(force) people to save:-
- For future use: People set aside a part of their incomes in order to acquire their desired goods and services in future; like to pay rent, schools fees, transport fare, to buy house or building materials, to buy household equipment, e.g. televisions. chairs, radios. beds. clothes. etc.
- For unforeseen contingencies (emergencies): People endeavour to save so that they can pay for unexpected expenses: medical expenses (paying for cost of illness), legal expense, entertainment of unexpected visitors, cost of accident and other emergencies.
- For investment (transaction): Many people save money with which to set up firms. Shops, to build houses, to set up workshops and to start other types of business in order to generate incomes.
- For earning interest/dividends (speculation): People save a huge amount of money and put it in the bank – fixed deposit account to earn interest. Some people save money for the purpose of buying shares, stocks and debentures in public liability companies and government securities in order to earn high interest and dividends.
- For protection in old age/legacy: Some people also save so that they can have sufficient money for protection (to use) during pension or old age. While others save for legacy, or to buy life assurance policy (long-term saving scheme until death) in order to bequeath (give) a large amount of money to their families (to inherit).
- Government: The government also saves – accumulates foreign exchange (foreign currencies) or gold for economic growth and development:
- Rapid industrialization – setting up a variety of companies.
- Building of social and economic amenities: roads, schools, dams, hospitals, banks, etc.
- Development of agriculture.
- Emergencies – unforeseen contingencies.
- To build up’ a stock of armaments (war materials).
The following are some of the factors that determine the level of saving; i.e. they are the factors (things) that make it possible for people to save.
- Size of income: The major factor that determines the level of saving is the amount of income in a given period. The higher the income, the larger the amount of money that could be saved per period.
- Government policy: Government can force people to save. Some government force their civil servants to register for National Provident Fund (NPF); while other force them to involve in house saving scheme, pension scheme, etc. Many governments encourage their citizens to save through the use of monetary policy (increase in interest rate) and fiscal policy (decrease in tax rates especially income tax.
- High rate of interest: People are more keen to save if the rate of interest is high. That is, a rising interest rate induces many people to save. However, some people also consider the real rate of interest (or interest rate adjusted for inflation) and not the nominal rate of interest .
- Political stability: The level of saving depends on political stability in a country. During the period of peace and harmony, amount of saving is generally high; while the period of war witnesses a negligible (very small) saving figure.
- Availability of financial institutions: Many people are encouraged to save if there are banks and other financial houses in their neigbourhood. And people can deposit and withdraw their money at any time. Some financial. houses, especially insurance companies, motivate (encourage) people to save through constant advertising programmes and personal call of their staff or agents at offices and houses canvassing for saving, i.e. persuading people to save. This action raises the level of saving in a community.
- Level of taxes: The higher the level or rates of taxes, especially income, poll, profit and property taxes, the lower the level of saving.
- Culture: The level of saving is high among the society that practise monogamy like European countries. And it is very low among nations that adopt polygamy or extended family system, especially African countries.
- Presence of social security: Availability of social security scheme, like pension and other government guaranteed security schemes, e.g. old people’s home makes people to be sure of good standard of living during old age. This reduces level of saving; and it raises level of consumption.