What Compels People to Save?
Each individual has his or her reason for saving money. Economists have been studying people in terms of managing or mismanaging their finances, and on the aspect of saving, these bright minds have actually come up with four theories on why people save.
Theories on Why People Save
Italian economist, Franco Modigliani, believes that people ease their spending over time. He suggests that people generally spend so much and save little or none at all while young but are likely to set aside some money as their income improves later in life. However, individuals tend to draw out most their savings upon reaching retirement.
People save money as preparation for financial emergencies. These “precautionary reasons” for saving suggests that individuals have a tendency to save more money if their income is erratic or if they don’t have a stable source of funds, and if they don’t have access to personal loan.
People, in general, want to be remembered. They want their memory to linger long after their death. The prospects of having to leave a legacy or inheritance to their children and their children’s children compel people to save money. Although economists don’t believe in altruism, some people do use inheritance to bribe their children in taking care of them when they get old.
Factors Affecting Saving Rate
Economic growth plays a huge role in the way people save money. If the economy is doing great, citizens naturally earn more than they need and they set aside excess income as savings.
The size of a household largely determines the amount of money saved. In most countries, the amount of savings declines when the number of children soars. A large family requires a large income to meet their needs, and may not have excess for savings.
International trade is directly proportional to a country’s savings rate. When exports rise, savings rise. That’s why emerging economies tend to have increased savings.
The more developed the financial system of an economy is, the lesser the saving rate because people have greater access to credit. In countries with complex financial systems, consumers tend to spend more and save less.
Fiscal policy also affects money savings. When government budget deficits expand, people appear to save more in preparation for future increase in taxes.
How about you, what compels you to save money? Is your saving habit affected by the factors mentioned above?