Savings – theories, concept, typology and determinants


Savings correspond to the part of the disposable income of economic agents, which is not devoted to immediate consumption. It is therefore considered as deferred consumption over time.

For households, savings is that part of their income that they do not spend on consumption. They will generally invest it to earn income. Very often, this savings is made in anticipation of a future investment (the acquisition of an apartment or a house), or the purchase of an expensive durable consumer good (car, etc.).

For companies, gross savings is the part of after-tax profits that is not distributed to shareholders. This savings allows the self-financing of investments and amortization.

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From the point of view of economic growth, the saving capacity of a country plays a fundamental role. Indeed, it is on it that the ability to finance investment is based: if the country consumes a large part of the wealth created each year, the investment may well be insufficient to ensure sustained growth in the long term.

On the other hand, if savings are high, there is reason to fear that consumption will slow down and that companies will not find enough outlets for their production, which would then trigger a slowdown in growth.

This savings capacity is measured by the savings rate which is the ratio between the amount of savings and the gross disposable income multiplied by 100.

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In France, for example, this household savings rate, calculated in relation to gross disposable income, is 18.8% in 2020 compared to 14.8% in 2019.

This rate can vary relatively, depending on the forecasts made by the agents: if they fear, for example, that the situation will deteriorate, they will save more (this is called precautionary savings) . It can be seen that, by doing this, they contribute to slowing down consumption, which contributes to maintaining or increasing unemployment.

The main theories of savings

Classic savings analysis

The Classics analyze savings and investment as the same dose. Savings hoarded by an individual must be used by an entrepreneur. At each moment, there is identity between savings and investment.

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For A. Smith (1723-1790), D. Ricardo (1772-1823) and T.R. Malthus (1766-1834), there is an identity between savings (S) and investment (I). Economic agents only save to invest; all saving is therefore both “non-consumption” and the purchase of capital goods.

To give up consuming is to invest. It is assumed that there is no hoarding, i.e. no income kept in money.

According to A. Smith and D. Ricardo, saving is a source of growth because it translates into capital accumulation. If it is necessary, it is not a sufficient condition:

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the division of labor and technical progress also play an important role.

According to T.R. Malthus, an excess of savings which is also an overinvestment (this is only a single action), can lead to a crisis of overproduction.

  • Increased savings implies increased investment
  • Fall in income spent on consumption implies a fall in demand for consumer goods

Neoclassical theory of thrift

The neo-classics take up the classic analysis to demonstrate that saving is a necessary prerequisite for investment.

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For them, the level of savings is determined by the interest rate. Indeed, within the framework of the neoclassical theory, the economic agent seeks to maximize his utility and when he has to make a trade-off between consumption and savings, he will consider what the savings will bring him, in other words, he will consider the interest rate. If this is high, the agent will be encouraged to save.

Since saving will ensure significant income in the future. Conversely, when the interest rate is low, the agent tends to save little, because savings will bring him little income in the future. It is therefore saving that precedes consumption. The key variable of the neo-classics is therefore the interest rate which makes it possible to adjust the two levels.

In other words, if the interest rate rises, we can think that households will save more because it will bring them more. Low interest rates lead to overinvestment and lower profitability of businesses and discourage savings.

The social protection system and cultural traditions also affect the savings rate: if pensions are low, households are encouraged to save during their working life to ensure their existence in their old age.

Savings according to Keynes

For Keynes, savings are all the more important as income is high. A low-income household will not satisfy its consumption needs and will not increase its savings following an increase in its income, its marginal propensity to save will be close to zero.

On the other hand, a high-income household will increase its savings following an increase in its income, its marginal propensity to save will be close to one. The relationship between disposable income and savings is therefore positive and increasing.

Macroeconomic theory is also useful for understanding current savings through the three motives for holding money mentioned by Keynes: transaction, precaution, and speculation.

The precautionary motive refers to short-term savings on non-binding liquid investments in return. The motive of speculation refers to long-term savings through the use of opportunities on the financial markets for products with uncertain returns such as stocks and bonds.

The Keynesian approach to saving behavior is quite different: here it is consumption that precedes saving. The level of savings is not determined by the interest rate but by the level of income of the agent. He consumes first and allocates the rest of his income (that which has not been consumed) to savings.

Franco Modigliani’s life cycle theory

This theory is inspired by the microeconomic work of Milton Friedman on the “inter-temporal” allocation of income to develop a theory of consumption and savings behavior or course of the life cycle.

Savings depend on the needs of the individual, which are not the same according to the stages of life. Savings are negative at the beginning of an adult’s life: he goes into debt to finance his needs, and during his period of activity he consumes less than he earns, which allows him to repay his loan, then build up savings to fund retirement. Once retired, he draws on his savings to live. Savings are a necessity, regardless of interest rates and inflation.

The concept of savings

Definition of savings

Savings correspond to the part of household disposable income that is not devoted to immediate consumption.

Savings are therefore, in economics, considered as deferred consumption over time. Each year, households save part of their disposable income. This savings effort therefore translates into cash flows that will feed household assets.

Wealth is therefore made up of all previous flows of savings made by households.

Reasons for saving

Households save for three main reasons:

  • Have liquidities: in order to allow a greater consumption expenditure in the near future.
  • Have a reserve: this reserve constitutes a margin of safety in order to deal with the vagaries of life (accident, illness, etc.).
  • Build up a heritage: this heritage can take different forms of investment and is used either to provide additional income or to be transmitted in the form of an inheritance to the saver’s descendants.

The different types of savings:


Hoarding is withdrawing money from the economic circuit by keeping it at home or by transforming it into non-productive value (purchase of jewellery, gold or precious stones, etc.).

The existence of hoarded savings in an economy disrupts the economic circuit that works when all the income distributed by companies during production returns to companies in the form of purchases for this same production.

In this case of hoarding, part of this production is not sold. This subsequently leads to a decrease in production and an increase in unemployment.

Investment (financial assets)

It results in a reinjection of savings into the economic circuit in the form of a deposit in a bank, the purchase of bonds or shares or a loan. It makes it possible to transfer savers’ financing capacities to economic agents who need financing.

Voluntary savings and forced savings

Voluntary savings are savings made up voluntarily by an economic agent. It is the result of his own decision.

Forced savings are made by an economic agent following the decision of another economic agent.
Example: compulsory levies made by the State, direct and indirect taxes and social security contributions, etc.

Precautionary or security savings

This savings is made to deal with possible risks (illness, job loss, etc.).

Social contributions levied by social security bodies can be considered precautionary savings, albeit forced.

The determinants of household savings

Household savings depend on:

The change in income:

Real income has a very important effect on the savings behavior of economic agents. The Keynesians, for example, sought to explain aggregate saving by the absolute level of income. They thus concluded that the propensity to save is stronger where the real per capita income is higher.

Thus, one of the most frequently cited causes for low savings in developing countries is attributed to low real per capita income. It is therefore to be expected that per capita income has a fairly significant influence on the variables explained


The effects of inflation on savings are particularly ambivalent. Rising and falling prices alter the real value of assets, and at the same time that of overall consumption.

On the one hand, to preserve the real value of their financial assets, agents are forced to save more, but on the other hand, the anticipation of inflation by economic agents can lead them to buy now what ‘they will pay more later.

The investment:

When a household buys or builds a home, it decreases its consumption and therefore increases its savings.

Consumer credit:

When consumer credit is cheap, consumption increases at the expense of savings.

The interest rate :

The interest rate generally influences household savings, a low rate discourages savings and, conversely, it encourages them.

The exchange rate:

The exchange rate plays an important role in the mobilization of savings, it influences the ability to attract capital from nationals abroad and to dissuade nationals from exporting their capital abroad.

Taxation :

Taxes can be analyzed as a compensation between private savings and public savings. But we remember the theoretical contribution of supply-side economists (Laffer and Mundell) on the possible reduction in the yield of taxes. To this must be added the effect first described by Ricardo then taken up and updated by Robert BARRO according to which an increase in the deficit would lead to an increase in precautionary savings to deal with the future increase in taxes (rational expectations of agents) .

An increase in the taxation of savings against a reduction in social contributions can generate a small increase in purchasing power, very symbolic. Savings will suffer a little to the benefit of consumption and growth. At the same time, it will temporarily increase corporate tax. Keynesian reasoning.


Savings play a crucial role in personal financial management and in the national economy. The different theories of savings and the determinants that influence savings decisions show the importance of making informed financial decisions. Whether it is to achieve long-term goals, deal with the unexpected or invest in the future, saving remains a fundamental pillar of financial stability.

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