Private savings is one of the most important macroeconomic variables, since it reflects the capacity of economic agents to generate wealth and finance investment.
In this article we will explain what private savings is, what factors determine it and how to increase it.
What is private savings?
Private savings is the part of the disposable income of private economic agents (households and firms) that is not used for consumption. In other words, it is the difference between private agents’ income and expenditure.
Private savings are of great importance to the economy, since they represent the main source of financing for private investment, which in turn is the engine of economic growth.
It also influences the balance of payments, as it determines the current account balance, which is the difference between savings and investment.
What are the types of savings
The types of savings can be classified according to the objective pursued or according to the agent who carries it out. According to the objective, emergency savings can be distinguished, retirement savings, savings for children and savings for projects. These types of savings have different maturities, risks and returns, and require different investment strategies.
Depending on the agent, we can distinguish between public savings, private savings and national savings. public savings, private savings and national savings.. These types of savings reflect the capacity to generate wealth and finance investment in the different sectors of the economy.
What factors determine private savings?
Private savings depend on several factors, both economic and social, which affect the consumption and investment decisions of private agents.
Some of the most relevant factors are the following:
- The level of incomeThe higher the income, the greater the capacity to save, provided that consumption does not increase in the same proportion.
- The interest rateThe higher the interest rate, the greater the incentive to save, since the opportunity cost of not consuming is reduced and the profitability of financial assets is increased.
- InflationThe higher the inflation, the lower the incentive to save, since the purchasing power of money is reduced and the opportunity cost of not consuming increases.
- Uncertainty: the greater the uncertainty, the greater the propensity to save.The greater the uncertainty, the greater the propensity to save, since it increases the demand for precaution and reduces the demand for consumption and investment.
- ExpectationsThe greater the optimism about the future, the lower the propensity to save, as confidence increases and the demand for caution decreases.
- Habits and preferencesThe private saving is also influenced by cultural, social and personal factors, which determine the degree of risk aversion, patience, planning and satisfaction of private agents.
How can I increase my private savings?
There are several strategies that individuals can use to increase their private savings, such as:
Establish savings goalsIt is important to have clear and specific goals for saving, for example, saving for education, housing, retirement, etc. These goals help to motivate and plan savings.
Create a budgetMonthly budgeting allows you to identify unnecessary expenses and find areas where you can reduce spending. It also allows you to allocate a percentage of your income to savings, and follow it in a disciplined way.
Prioritizing savingsAs with any other major expense, saving should be a priority. One way to do this is to save first and spend later, and not the other way around. Another way is to automate savings, for example, through direct debits or voluntary contributions to the Afore.
Taking advantage of tax benefitsThere are financial products that allow savings to be tax-deductible, such as Personal Retirement Plans (PPR) or life insurance. These products encourage long-term savings and generate returns.
Search for investment optionsSaving does not only imply saving money, but also making it grow. To do so, you can look for investment options that fit the risk profile, time horizon and objective of each individual.
Which countries save the most?
According to data published by the World Bank, the countries that save the most in the world as a percentage of their GDP are Qatar, Kuwait and China.
These countries have oil or export-based economies, and tend to have high incomes and low expenditures.
National savings in these countries is mainly composed of public savings, which is the difference between government revenues and expenditures. Private saving, which is the difference between household and corporate income and expenditure, is usually smaller.
