3.2: Why Do People Save?

Saving is a fundamental economic activity that plays a critical role both at the individual and aggregate levels. In macroeconomics, saving is represented by the portion of disposable income that is not spent on current consumption.

Individuals typically save during their working years for their retirement.. Savings accumulated during periods of high income allow individuals to maintain a stable standard of living during periods when income is lower or nonexistent. This behavior results in a pattern where savings rise during middle age and decline during retirement.

Uncertainty about future income, health, and employment also motivates savings. Individuals set aside resources to protect against unforeseen circumstances such as medical emergencies, job loss, or economic downturns. This form of saving provides a financial buffer that enhances economic security and reduces vulnerability to shocks.

The desire to leave behind wealth for future generations also drives saving behavior. Saving for the financial well-being of descendants allows individuals to provide stability, opportunity, and support for future generations.

The motivations behind saving are varied and rooted in individual needs, life-cycle considerations, uncertainty about future income, and broader societal and economic influences. Understanding these motivations provides essential insights into economic behavior and the functioning of national economies.

Consider a family in which Mary is the earning member. The family manages its expenses, including food, healthcare, and leisure activities.

She knows she won’t work forever. One day, her paycheck will stop, but the expenses will continue. She will still need money for essentials such as health care and the freedom to enjoy her time. To prepare, Mary regularly sets aside a portion of her income. She wants to maintain a decent lifestyle even after retirement. This is known as the life-cycle motive for saving.

Mary understands that life can be unpredictable. For example, a sudden medical emergency could disrupt her plans. To stay prepared, she builds an emergency fund. This is called the precautionary motive for saving.

Mary has a teenage daughter and wants to leave behind a solid financial foundation for her. For example, Mary saves money to help her daughter buy a house in the future. She also wants to leave behind savings to support her daughter’s future. This is the bequest motive for saving.

For many people, saving is about preparing for retirement, staying ready for emergencies, and providing for the next generation.