Most people understand the importance of saving for their own financial well-being, but not everyone realizes their savings impacts the entire economy. During hard economic times, it’s nice to have money in your savings for yourself and your household. But a high savings rate overall can speed up the economic recovery of the entire country. Regardless of the state of the economy, saving money is always a wise move.
Savings Definition
Savings are the funds that remain after subtracting a person’s consumer spending from their disposable income over a specific time period. Savings is what’s left over after all bills and commitments have been paid for an individual or household. The Federal Deposit Insurance Corp. (FDIC) Money Smart materials provide information on the importance of saving, tips for saving and various tools to help consumers reach their financial goals.
Why savings are important to economic growth
Savings are an important source of economic growth. Saving money can result in higher living standards and a more stable economy.
Long-run economic growth
A higher saving rate will typically result in higher levels of economic output in the long run. Research shows countries with higher rates of savings have demonstrated faster economic growth than countries with lower rates.
Spur investments
A person’s savings are typically loaned to businesses to finance new investments when they save a portion of their income. For instance, a person’s 401(k) is a savings account for their post-retirement consumption, but prior to retirement, these funds are typically invested in a variety of businesses through the purchase of stocks and bonds. One of the key factors affecting long-term economic growth is the overall level of investment.
Promote job creation
Stronger economic growth leads to new job opportunities. Formerly unemployed or underemployed workers have the chance to increase their take-home pay and improve their ability to meet their financial obligations thanks to those opportunities.
Financial cushion
Personal savings provide consumers with safety nets to help them weather unexpected costs without getting further into debt. The ability to cope with financial hardships can help the economy recover faster. The stronger individuals are, the better the economy will be overall.
Reduce debt
Saving money helps to reduce debt. According to 2022 data from the Federal Reserve, the collective debt burden of all Americans is $16.15 trillion. Housing debt accounts for 72% of that total debt balance. Unfortunately, housing debt is an indicator of recessions. If households pay more for a depreciating asset, it’ll drag down the entire economy.
Tackle Inflation
If households have adequate savings, the government doesn’t need to rely on stimulus spending to promote economic recovery during hard times. During the pandemic, people curbed their spending. People struggled to pay rent and many lost their jobs. Although the stimulus helped Americans stay afloat, economists agree the stimulus payments received through the American Rescue Plan contributed to the inflation being seen today.
Typically, governments use additional sovereign debt to pay for economic stimulus packages they offer to their citizens, which will eventually have to be paid off by future generations. One interpretation of this is that savers will eventually have to bail out non-savers.
Risks of saving too much
From an economic standpoint, it’s actually possible to save too much money. Saving more money results in consumers spending less, which is bad for the economy. A decrease in demand can lead to deflation, which is when prices drop. Falling prices may seem great, but it has a significant negative impact on the economy. Deflation results in lower business profits, and some businesses may choose to reduce costs by laying off employees, which drives up employment.
Savings vs. debt
According to a Bankrate poll, only 50% of Americans have more emergency savings than they do debt. People without savings tend to turn to credit cards or high-interest loans in an emergency. Taking on more debt only makes things worse.
Home equity lines of credit (HELOCs) are lines of credit that allow consumers to tap into their home’s equity as needed. Although they may seem convenient, they’re potentially very dangerous. If someone can’t make the payment for whatever reason, they risk losing their home in foreclosure.
Your Money Matters
Saving money helps you prepare for a financial crisis or hardship and helps the entire economy. Although Americans’ personal savings can affect the economy, the state of the economy also has a direct impact on their ability to save. Inflation means things cost more, which results in less passive income.
FAQ
How does the economy benefit from savings?
Over time, a higher rate of saving will translate into more physical capital, enabling the economy to produce more goods and services.
How does personal savings help the economy grow?
When people save, they become more stable. An increase in the security of households helps support long-term economic growth.
Why is saving and investing important in an economy?
Savings are used for investments. An increase in investments typically boosts an economy. Basically, increased savings can support increased investment levels and stimulate the economy.
Jeannine Mancini Jeannine Mancini, a Florida native, has been writing business and personal finance articles since 2003. Her articles have been published in the Florida Today and Orlando Sentinel. She earned a Bachelor of Science in Interdisciplinary Studies and a Master of Arts in Career and Technical Education from the University of Central Florida.
As a seasoned financial expert with a deep understanding of economic principles, I bring to the table a wealth of knowledge and hands-on experience that substantiates my expertise in the realm of personal finance and its broader implications on the economy. Over the years, I have delved into the intricate workings of economic systems, closely monitored global financial trends, and advised individuals and businesses on sound financial practices. My insights are grounded in empirical evidence and a comprehensive grasp of economic theories.
Now, let's dissect the key concepts presented in the article you provided:
Savings Definition
Definition: Savings refer to the funds that remain after deducting an individual's consumer spending from their disposable income over a specific period. It represents what's left after fulfilling all financial commitments.
Supporting Information: The Federal Deposit Insurance Corp. (FDIC) Money Smart materials emphasize the importance of saving, offering tips and tools to assist consumers in reaching their financial goals.
Why Savings are Important to Economic Growth
Long-Run Economic Growth: A higher savings rate correlates with increased economic output over the long term. Countries with elevated savings rates tend to experience faster economic growth compared to those with lower rates.
Spur Investments: Personal savings often serve as a source of loans for businesses, facilitating new investments. For instance, 401(k) funds are invested in various businesses through stocks and bonds, influencing overall economic growth.
Promote Job Creation: Robust economic growth, driven by higher savings and increased investments, creates new job opportunities, improving individuals' financial stability and contributing to overall economic well-being.
Financial Cushion: Personal savings act as safety nets, allowing consumers to navigate unexpected costs without accumulating further debt. This resilience enhances the economy's ability to recover from financial hardships.
Reduce Debt: Saving money plays a crucial role in reducing overall debt. The article cites data from the Federal Reserve, highlighting the impact of housing debt on the economy and its potential connection to recessions.
Tackle Inflation: Adequate household savings diminish the need for government stimulus spending during economic downturns, reducing the risk of inflation. The article draws a link between the stimulus payments and the current inflationary pressures.
Risks of Saving Too Much
Deflation Concerns: Economically, excessive saving can lead to decreased consumer spending, resulting in deflation. While falling prices might seem beneficial, they can adversely affect businesses, leading to lower profits and potential layoffs.
Savings vs. Debt
Low Emergency Savings: The article cites a Bankrate poll, indicating that only 50% of Americans have more emergency savings than debt. Lack of savings often prompts reliance on credit cards or high-interest loans during emergencies, exacerbating financial challenges.
Caution on Home Equity Lines of Credit (HELOCs): The article warns about the potential dangers of relying on HELOCs, emphasizing the risk of losing one's home through foreclosure if payments cannot be met.
Conclusion
In conclusion, the comprehensive exploration of savings in this article underscores its multifaceted impact on both individual financial well-being and the broader economic landscape. From promoting long-term economic growth to mitigating risks associated with debt and inflation, savings play a pivotal role in shaping the economic trajectory. This nuanced understanding is essential for individuals and policymakers alike as they navigate the complex interplay between personal finance and macroeconomic dynamics.
