Subject: Putting Money Aside [Print This Page] Author:
bb818 Time: 30-1-2008 12:50 AM Subject: Putting Money Aside
[fontads]Saving[/fontads]
In terms of personal finance, saving refers to preserving money for future use - typically by putting it on deposit - this is distinct from investment where there is an element of risk. Saving differs from savings in that the first refers to the act of putting aside money for future use, whereas the second refers to the money itself once saved.
For example: you may decide to start saving 10% of your income; because you aim for your savings to grow into an amount sufficient to buy a car.
[fontads]Saving in economics[/fontads]
In economics, personal saving has been defined as personal disposable income minus personal consumption expenditure. In other words, income that is not consumed by immediately buying goods and services is saved. Other kinds of saving can occur, as with corporate retained earnings (profits minus dividend and tax payments) and a government budget surplus.
There is some disagreement about what counts as saving. For example, the part of a person's income that is spent on mortgage loan 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.
"Saving" differs from "savings." The former refers to an increase in one's assets, an increase in net worth, whereas the latter refers to one part of one's assets, usually deposits in savings accounts, or to all of one's assets. 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.
Saving is closely related to investment. By not using income to buy consumer goods and services, it is possible for resources to instead be invested by being used to produce fixed capital, such as factories and machinery. Saving can therefore be vital to increase the amount of fixed capital available, which contributes to economic growth.
However, increased saving does not always correspond to increased investment, if savings are stashed in a mattress or otherwise not deposited into a financial intermediary like a bank there is no chance for those savings to be recycled as investment by business. This means that saving may increase without increasing investment, possibly causing a short-fall of demand (a pile-up of inventories, a cut-back of production, employment, and income, and thus a recession) rather than to economic growth. (This is often called the "paradox of thrift.") In the short term, if saving falls below investment, it can lead to a growth of aggregate demand and an economic boom. In the long term if savings falls below investment it eventually reduces investment and detracts from future growth. Future growth is made possible by foregoing present consumption to increase investment.
In a primitive agricultural economy savings might take the form of holding back the best of the corn harvest as seed corn for the next planting season. If the whole crop were consumed the economy would deteriorate to hunting and gathering the next season.
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Classical economics posited that interest rates would adjust to equate saving and investment, avoiding a pile-up of inventories (general overproduction). A rise in saving would cause a fall in interest rates, stimulating investment. But Keynes argued that neither saving nor investment were very responsive to interest rates (i.e., that both were interest inelastic) so that large interest rate changes were needed. Further, it was the demand for and supplies of stocks of money that determined interest rates in the short run. Thus, saving could exceed investment for significant amounts of time, causing a general glut and a recession.
[fontads]Saving in personal finance[/fontads]
Within personal finance the act of saving corresponds to nominal preservation of money for future use, although inflation can still erode its real value. A deposit 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.).
Savings within personal finance refers to the accumulated money put aside by saving.
Within personal finance, money used to purchase shares, put in a collective investment scheme 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 realised, unlike cash saving(s). Lower levels of risk normally apply to savings e.g. interest rates may fail to preserve its real value, or in extreme cases loss can occur due to bank failure.
In many instances the term saving and investment are used interchangeably which confuses this distinction. For example many deposit accounts are labeled as investment accounts by banks for marketing purposes. To help establish whether an asset is saving(s) or an investment you should ask yourself, "where is my money invested?" If the answer is cash then it is savings, if it is a type of asset which can fluctuate in nominal value then it is investment.
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