Consumer savings

What Is Consumer Savings?

Consumer savings refers to the portion of an individual's or household's disposable income that is not spent on current consumption of goods and services. It represents the accumulation of funds for future use, playing a critical role in personal finance and the broader economy. Savings can be held in various forms, from liquid assets like bank accounts to less liquid forms such as investments or retirement funds. The act of saving is fundamental to building an emergency fund, achieving long-term financial goals, and contributing to overall wealth accumulation.

History and Origin

The concept of consumer savings has evolved alongside economic development and financial systems. Historically, savings were often directly tied to physical assets or bartering, with reserves of goods representing future security. With the advent of formalized banking and financial institutions, the practice of depositing money for future use became widespread. In the United States, the personal saving rate has seen significant fluctuations over decades. For instance, the personal saving rate averaged 11.7% in the 1960s and 1970s, peaking at 17.3% in May 1975 before gradually declining to a record low of 1.4% in July 2005.¹⁷ During the COVID-19 pandemic, there was an unprecedented spike in consumer savings, with Americans saving over 10% of their earnings from March 2020 through April 2021, reaching a peak of 32.0% in April 2020.¹⁶ These shifts reflect changes in economic conditions, consumer behavior, and evolving financial landscapes.

Key Takeaways

• Consumer savings is the amount of disposable income that consumers retain after expenditures and taxes.
• It is a vital component of household financial stability and a key indicator of economic health.
• Savings facilitate future consumption, investment, and provide a buffer against unforeseen financial shocks.
• The personal saving rate is calculated as personal saving as a percentage of disposable personal income.
• Understanding consumer savings trends is crucial for both individual financial planning and macroeconomic analysis.

Formula and Calculation

The primary method for calculating consumer savings at a national level, often referred to as personal saving, is derived from national income and product accounts. The U.S. Bureau of Economic Analysis (BEA) defines personal saving as disposable personal income less personal outlays.¹⁵,¹⁴

The formula can be expressed as:

Where:

• Disposable Personal Income (DPI) is the income remaining to persons after deducting personal current taxes. This is the income available for spending or saving.
• Personal Consumption Expenditures (PCE) represents the market value of goods and services purchased by, and on behalf of, households.¹³
• Personal Current Transfer Payments include transfers to government and to the rest of the world.
• Personal Interest Payments are interest paid by households to businesses and government.

At an individual level, consumer savings is simply the amount of money an individual or household sets aside from their income after covering all their expenses.

Interpreting Consumer Savings

The level of consumer savings is a critical economic indicator. A higher personal saving rate generally suggests that households have a greater capacity for future investment and can better withstand economic downturns. This also means that a larger pool of funds may be available for capital markets, potentially leading to increased business investment and economic growth. Conversely, a low personal saving rate can signal that consumers are spending most of their disposable income, which might stimulate short-term economic activity but could leave households vulnerable to financial shocks and reduce the availability of funds for long-term productive investments. Policymakers monitor consumer savings to gauge the financial health of the population and to inform decisions related to monetary policy and fiscal policy.

Hypothetical Example

Consider a household, the Johnsons, with a monthly disposable income of $5,000. Each month, they track their spending. Their personal consumption expenditures typically include $1,500 for housing, $800 for food, $500 for transportation, $300 for utilities, and $400 for discretionary spending. They also have $200 in personal interest payments on a loan.

To calculate their monthly consumer savings:

Disposable Personal Income: $5,000
Total Outlays: $1,500 (housing) + $800 (food) + $500 (transportation) + $300 (utilities) + $400 (discretionary) + $200 (interest payments) = $3,700

Consumer Savings = Disposable Personal Income - Total Outlays
Consumer Savings = $5,000 - $3,700 = $1,300

In this example, the Johnsons' monthly consumer savings amount to $1,300, which they can then allocate to various financial assets, such as a savings account, investments, or debt reduction.

Practical Applications

Consumer savings data is a vital tool for economists, policymakers, and financial analysts. At the macroeconomic level, aggregate consumer savings contribute to a nation's overall saving rate, which is essential for funding domestic investment and sustained economic expansion. When households save more, these funds can flow into banks and other financial institutions, becoming available for lending to businesses for expansion or to other consumers for major purchases like homes.

For individuals, consumer savings are the foundation of sound financial planning. It allows for the creation of emergency funds, which provide a buffer against unexpected expenses like job loss or medical emergencies. Furthermore, regular savings are crucial for long-term goals such as retirement planning, purchasing a home, or funding education. The Federal Reserve conducts the Survey of Consumer Finances (SCF) every three years, which collects detailed financial data from thousands of American households to understand their financial condition, including their savings, investments, and debt.¹²,¹¹ This survey helps guide economic policy at the highest levels.¹⁰

Limitations and Criticisms

While consumer savings are generally viewed positively, several limitations and criticisms exist regarding their measurement and interpretation. The official personal saving rate, as reported by the U.S. Bureau of Economic Analysis (BEA), primarily focuses on saving from current income and does not fully capture changes in household wealth due to asset appreciation, such as increases in real estate values or stock portfolios.⁹ This can lead to an understatement of true household financial health if individuals reduce saving out of current income due to significant capital gains on their existing assets.⁸

Another criticism is that aggregate savings figures can mask significant disparities among different income groups. For instance, data from the Federal Reserve indicates that in 2022, a much smaller percentage of lower-income households saved a portion of their income compared to higher-income households.⁷ This highlights that while the overall rate might appear healthy, many households may still be struggling to build financial reserves. Furthermore, a sharp increase in savings can sometimes be a sign of economic uncertainty, as consumers might hoard cash rather than spend, potentially slowing economic recovery. Conversely, excessively low savings can leave households vulnerable to economic shocks, increasing reliance on credit and potentially leading to higher household debt and financial fragility.⁶,⁵

Consumer Savings vs. Household Debt

Consumer savings and household debt are two sides of the household balance sheet, representing a fundamental tension in personal finance and macroeconomics.⁴ Consumer savings represent the accumulation of unspent income, contributing to a household's net worth and providing financial security and future purchasing power. It reflects a surplus of income over expenditure. In contrast, household debt refers to the total amount of money owed by households, including mortgages, credit card balances, and personal loans. It represents a claim against future income. While savings build a financial buffer and enable future investment, debt consumes future income through interest payments and principal repayments. High levels of consumer savings generally indicate financial resilience, while escalating household debt can signal financial strain and increased susceptibility to economic downturns or rising interest rates.

FAQs

What is the current personal saving rate in the U.S.?

The U.S. Bureau of Economic Analysis (BEA) regularly updates the personal saving rate, which is personal saving as a percentage of disposable personal income. This figure fluctuates monthly based on economic conditions and consumer behavior.³,²

Why are consumer savings important for the economy?

Consumer savings are crucial for economic health because they provide a pool of funds for investment. These savings can be channeled through financial institutions to fund business expansion, infrastructure projects, and innovation, which are all drivers of economic growth. Savings also act as a buffer against economic shocks for individual households.¹

How do inflation and interest rates affect consumer savings?

Inflation erodes the purchasing power of savings over time, meaning that the same amount of saved money will buy fewer goods and services in the future. Conversely, higher interest rates can incentivize saving by offering a greater return on deposited funds, making it more attractive for consumers to keep their money in savings accounts or other interest-bearing instruments.

What is the difference between gross saving and net saving?

Gross saving refers to total saving before accounting for the consumption of fixed capital (depreciation). Net saving subtracts this depreciation, providing a measure of the saving available for increasing the capital stock. For consumers, the commonly cited "personal saving rate" typically refers to net saving from disposable income.

How can I increase my consumer savings?

Increasing consumer savings often involves a combination of strategies. These include budgeting to identify areas for reduced personal consumption expenditures, increasing income, setting clear financial goals, automating savings transfers to dedicated accounts, and minimizing unnecessary debt. Consistency and discipline are key to building substantial consumer savings over time.