Not to be confused with Savings.
Saving is income not spent, or deferred consumption. Methods of saving include putting money aside in, for example, a deposit account, a pension account, an investment fund, or as cash. Saving also involves reducing expenditures, such as recurring costs. In terms of personal finance, saving generally specifies low-risk preservation of money, as in a deposit account, versus investment, wherein risk is a lot higher; in economics more broadly, it refers to any income not used for immediate consumption.
Saving differs from savings. The former refers to the act of increasing one's assets, 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. This distinction is often misunderstood, and even professional economists and investment professionals will often refer to "saving" as "savings" (for example, Investopedia confuses the two terms in its page on the "savings rate").
In different contexts there can be subtle differences in what counts as saving. For example, the part of a person's income that is spent on mortgage loan principal 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 is closely related to physical investment, in that the former provides a source of funds for the latter. 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 not deposited into a financial intermediary such as 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. 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 saving falls below investment it eventually reduces investment and detracts from future growth. Future growth is made possible by foregoing present consumption to increase investment. However savings not deposited into a financial intermediary amount to an (interest-free) loan to the government or central bank, who can recycle this loan.
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 convert to hunting and gathering the next season.
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, hence always investment would equal saving. But Keynes argued that neither saving nor investment was very responsive to interest rates (i.e., that both were interest inelastic) so that large interest rate changes were needed to re-equate them after one changed. 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.
Saving in personal finance
Within personal finance, the act of saving corresponds to nominal preservation of money for future use. 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.).
Within personal finance, money used to purchase stocks, put in an investment fund 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 realized, unlike cash saving(s). Cash savings accounts are considered to have minimal risk. In the United States, all banks are required to have deposit insurance, typically issued by the Federal Deposit Insurance Corporation or FDIC. In extreme cases, a bank failure can cause deposits to be lost as it happened at the start of the Great Depression. The FDIC has prevented that from happening ever since.
In many instances the terms saving and investment are used interchangeably. For example, many deposit accounts are labeled as investment accounts by banks for marketing purposes. As a rule of thumb, if money is "invested" in cash, then it is savings. If money is used to purchase some asset that is hoped to increase in value over time, but that may fluctuate in market value, then it is an investment.
Saving in economics
See also: National savings
In economics, saving is defined as income minus consumption. The rate at which people do this is called the marginal propensity to save or average propensity to save. The rate of saving is directly related to both the interest rate and investment, largely by way of the capital markets.
- Dell'Amore, Giordano (1983). "Household Propensity to Save", in Arnaldo Mauri (ed.), Mobilization of Household Savings, a Tool for Development, Finafrica, Milan.
- Modigliani, Franco (1988). "The Role of Intergenerational Transfers and the Life-cycle Saving in the Accumulation of Wealth", Journal of Economic Perspectives, n. 2, 1988.
An important component of India’s financial savings scenario is the large-scale participation of general public through various small saving schemes initiated by the central government. In this context, the Small Saving Schemes (SSSs) are important source of household savings in India. Different small saving schemes have mobilized money from households and channelized it to government so that the centre and states can finance a prat of their expenditure.
The Central Government operates Small Savings Schemes (SSS) through the nationwide network of about 1.5 lakh post offices, more than 8,000 branches of the Public-Sector Banks and select private sector banks and more than 5 lakh small savings agents.
The Small Savings Schemes can be grouped under three:
(i) Post office Deposits: Post Office Savings Account, Post Office Time Deposits (1,2,3 and 5 years), Post Office Recurring Deposits, Post Office Monthly Account,
(ii) Savings Certificates: National Savings Certificate (VIII Issue) and Kisan Vikas Patra (iii) Social Security Schemes: Public Provident Fund, Senior Citizens Savings Scheme, and Sukanya Samriddhi Account.
National Small Savings Fund (NSSF)
National Small Savings Fund (NSSF) was established in 1999 within the Public Account of India for pooling the money from different SSSs. Collections from all small savings schemes ae credited to the NSSF. Similarly, withdrawals under small savings schemes by the depositors are made out of this Fund. The money in the account are used by the centre and states to finance their fiscal deficit. The balance in the Fund is invested in Central and State Government Securities. Pattern of utilization of the fund among the centre and states is decided from time to time by the Government of India.
Objective for the formation of a dedicated fund for small savings is to de-link small savings transactions from the Consolidated Fund of India. Since NSSF operates in the Public Account, its transactions do not impact the fiscal deficit of the Centre directly. As an instrument in the public account, the balances under NSSF are direct liabilities and constitute a part of the outstanding liabilities of the Centre. The NSSF flows affect the cash position of the Central Government.
Administration of Small Savings or NSSF
The NSSF is administered by the Government of India, Ministry of Finance under National Small Savings Fund Rules, 2001, which is derived from Article 283(1) of the Constitution.
Funds collected under SSS are the liabilities of the Union government accounted for in the Public Accounts of India and the government acts like a banker or trustee.
Use of proceeds from NSSF
As per the recommendations of the Fourteenth Finance Commission, the government has excluded states (except four states) from the use of Small Saving Scheme money. This is because the SSSs have slightly higher interest rate than the loans procured by states.
The NSSFs will be used by the centre and the interest and principal will be the liability of the central government. Previously, states have used the proceeds from NSSF.
Importance of small savings schemes
Small saving schemes helps to support the social security objectives at the same time, helping as a tool of resource mobilization for the government. Several small saving schemes like Senior Citizens Savings Fund, Sukanya Samridhi Yojana and PPF are supporting social securities of different sections. Government also gives slightly high interest rate for these schemes compared to the average interest in other financial instruments.
Rationalizing the interest rate structure of Small Saving Schemes
The SSSs are similar to bank saving schemes and there is competition between the two. Hence, there is a need to align the interest rate of SSSs with that of bank savings. Government in this regard has aligned the interest rate for SSS with that of government bonds of corresponding maturities. A higher spread is also provided for important SSSs that have social objectives.
Since April 2016, interest rates of all small saving schemes have been revised on a quarterly basis. Interest rate will be fixed on the basis of G-Sec yields of the previous three months.
Interest rate on social development oriented small saving schemes
There are some social development oriented SSSs like- Sukanya Samriddhi Yojana, the Senior Citizen Savings Scheme and the Monthly Income Scheme. Government is allowing an interest spread (higher interest rate) for these instruments over their corresponding maturity government securities. These schemes enjoy interest rate spread of 75 bps, 100 bps and 25 bps over the G-sec rate of comparable maturity. The interest rate on the senior citizens scheme is paid quarterly.