Personal saving

What Is Personal Saving?

Personal saving represents the portion of an individual's or household's disposable income that is not spent on consumption or current transfer payments. It is a fundamental concept within macroeconomics and personal finance, reflecting the act of setting aside funds for future use rather than immediate spending. This accumulated wealth can be used for various purposes, from building an emergency fund to making long-term investments.

When individuals engage in personal saving, they contribute to the pool of funds available for investment in the broader economy. This saving behavior is tracked by government agencies, such as the U.S. Bureau of Economic Analysis (BEA), which publishes the personal saving rate as part of the National Income and Product Accounts (NIPA). The personal saving rate is considered an indicator of consumer behavior and overall economic health, influencing projections for economic growth.

History and Origin

The concept of personal saving has existed as long as individuals have had the foresight to set aside resources for future needs. Economically, the systematic measurement and analysis of personal saving gained prominence with the development of national income accounting frameworks. In the United States, the Bureau of Economic Analysis (BEA) is responsible for compiling and publishing data on personal saving as part of the National Income and Product Accounts (NIPA). These accounts, which provide comprehensive data on U.S. economic activity, have evolved over decades to refine the definitions and methodologies used for various economic aggregates, including personal income, personal consumption expenditures, and personal saving. The NIPA Handbook, available from the BEA, details the fundamental concepts and methods behind these economic measures.¹⁷

Historically, changes in the personal saving rate have been influenced by various factors, including economic downturns, changes in consumer confidence, and shifts in financial regulations. For instance, the U.S. personal saving rate experienced a sharp decline in the latter half of the 1990s, reaching very low levels compared to its historical average, before trending upward in the years following the 2008 financial crisis.¹⁶,¹⁵

Key Takeaways

• Personal saving is the residual income after consumption and taxes, reflecting an individual's or household's unspent disposable income.
• It serves as a critical component for accumulating wealth, contributing to financial security and long-term financial goals.
• The personal saving rate, reported by the BEA and tracked by entities like FRED, is a key macroeconomic indicator of consumer behavior.¹⁴,¹³
• Personal saving can be deployed into various financial assets, from cash in bank accounts to investments in the capital markets.
• Understanding personal saving is essential for both individual financial planning and the analysis of national economic trends.

Formula and Calculation

Personal saving is calculated as the difference between disposable personal income (DPI) and personal outlays. Disposable personal income is the income remaining after personal current taxes. Personal outlays primarily consist of personal consumption expenditures (PCE), along with personal interest payments and personal current transfer payments.

The formula can be expressed as:

Alternatively, since personal outlays are largely driven by personal consumption expenditures:

The personal saving rate is then calculated as personal saving as a percentage of disposable personal income:

This rate is widely reported by economic data sources like FRED.¹²

Interpreting the Personal Saving

Interpreting personal saving involves understanding its implications for an individual's financial health and the broader economy. A higher personal saving rate generally indicates that households are setting aside a larger portion of their income, which can lead to increased financial security and a stronger capacity for future investment. Conversely, a low or negative personal saving rate suggests that households are spending most or more than their current income, potentially relying on debt to fund consumption.

From a macroeconomic perspective, the aggregate personal saving rate provides insights into consumer behavior and its potential impact on economic growth. A sustained increase in personal saving could indicate reduced consumer spending in the short term, but it also provides a pool of funds for capital markets, which can foster long-term investment and productivity gains. The Organisation for Economic Co-operation and Development (OECD) regularly publishes data on household saving rates across different countries, allowing for international comparisons of saving behavior.¹¹ Factors like inflation and the overall economic climate can significantly influence how individuals interpret their need for and ability to engage in personal saving.

Hypothetical Example

Consider Sarah, a recent college graduate earning a monthly after-tax income (disposable income) of $4,000. Each month, she tracks her expenditures to understand her personal saving.

Here's a breakdown of her typical monthly financial activity:

• Disposable Personal Income: $4,000
• Rent: $1,200
• Groceries: $400
• Utilities: $150
• Transportation: $100
• Entertainment: $300
• Student Loan Payment: $250
• Miscellaneous Personal Consumption Expenditures: $200

First, calculate her total personal outlays:
Total Personal Outlays = $1,200 (Rent) + $400 (Groceries) + $150 (Utilities) + $100 (Transportation) + $300 (Entertainment) + $250 (Student Loan) + $200 (Miscellaneous) = $2,600

Now, calculate her personal saving:
Personal Saving = Disposable Personal Income - Total Personal Outlays
Personal Saving = $4,000 - $2,600 = $1,400

Sarah's personal saving for the month is $1,400. This amount contributes to her net worth and can be directed toward various financial assets, such as a retirement account or a down payment for real estate.

Finally, calculate her personal saving rate:
Personal Saving Rate = ($1,400 / $4,000) * 100% = 35%

This example demonstrates how personal saving is calculated from an individual's income and spending.

Practical Applications

Personal saving has numerous practical applications across personal finance, economics, and public policy. For individuals, it is the cornerstone of building wealth and achieving financial independence. Funds from personal saving can be allocated to various investment vehicles, such as stocks, bonds, or retirement accounts, to grow wealth over time through compounding returns. It also allows for the accumulation of liquid assets, crucial for emergency funds or large purchases without incurring debt.

In the broader economy, aggregate personal saving data is used by economists and policymakers to gauge the financial health of households and predict future consumer spending trends. The U.S. Bureau of Economic Analysis (BEA) regularly releases data on the personal saving rate, which is closely watched for insights into consumer behavior and its impact on gross domestic product.¹⁰ Furthermore, the level of personal saving can influence a nation's capital formation and investment levels. When individuals save, these funds become available for businesses to borrow and invest, driving innovation and job creation. Understanding the drivers of personal saving can inform government policies related to taxation, social security, and economic stimulus, aiming to encourage desirable saving behaviors or mitigate the effects of low saving rates on national financial stability.

Limitations and Criticisms

While personal saving is a crucial economic indicator, its measurement and interpretation come with several limitations and criticisms. One primary critique centers on how it is calculated within the National Income and Product Accounts (NIPA). The NIPA definition of personal saving is derived as a residual, meaning it is the portion of personal income left after personal outlays and taxes. This method can make it highly sensitive to measurement errors in other components of income and expenditures.⁹

Furthermore, the NIPA measure of personal saving often excludes certain factors that individuals might consider part of their saving or wealth accumulation. For example, it typically does not account for unrealized capital gains on financial assets or real estate, which significantly impact an individual's net worth.⁸,⁷ This omission means that periods of substantial asset appreciation might lead to a seemingly low personal saving rate, even as households feel wealthier and increase consumption based on their growing overall wealth.⁶

Critics also point out that the NIPA personal saving rate doesn't fully capture changes in household balance sheets, such as debt reduction. While paying down debt can be viewed as a form of saving from a household's perspective, it may not directly translate into an increase in the NIPA personal saving figure. These nuances suggest that while the personal saving rate is a useful metric, it provides an incomplete picture of a household's true saving behavior and financial health.

Personal Saving vs. Household Saving

The terms "personal saving" and "household saving" are often used interchangeably, but in a precise economic context, particularly in national accounts, they can have slightly different scopes.

Personal saving is the official term used by the U.S. Bureau of Economic Analysis (BEA) in its National Income and Product Accounts (NIPA) to describe the portion of personal income that is not consumed or paid in taxes. It is a specific component within the NIPA framework that applies to the personal sector, which includes households and non-profit institutions serving households.⁵,⁴

Household saving, on the other hand, is a broader term often used more generally to refer to the saving behavior of households. International organizations like the Organisation for Economic Co-operation and Development (OECD) commonly use "household saving rate" to describe the share of household net disposable income that is saved, which is conceptually similar but may have slight differences in definitional scope or accounting treatment across different countries' national accounting systems.³,²

The confusion often arises because, in many practical discussions, the financial behavior of "persons" (as defined by BEA) is largely synonymous with "households." However, a rigorous analysis of national accounts might highlight subtle distinctions in the aggregation of income and outlays between these terms, depending on the specific accounting framework being referenced. For most individual financial planning purposes, the distinction is minor, with both terms generally referring to the income individuals and families set aside.

FAQs

What is the difference between saving and personal saving?

Saving is a general concept of setting aside money or resources for future use. Personal saving refers specifically to the amount of disposable income that individuals and households do not spend on consumption or pay in current transfer payments, as defined within national economic accounts.

How is personal saving measured in the U.S.?

In the U.S., personal saving is measured by the Bureau of Economic Analysis (BEA) as part of the National Income and Product Accounts (NIPA). It is calculated as disposable personal income less personal outlays (primarily personal consumption expenditures and personal interest payments).¹ The personal saving rate is then expressed as a percentage of disposable personal income.

Why is personal saving important for the economy?

Personal saving is important because it contributes to a nation's capital formation. The funds saved by individuals can be channeled into capital markets, providing resources for businesses to invest, expand, and innovate, which supports overall economic growth and productivity. It also indicates consumer confidence and financial health.

Can personal saving be negative?

Yes, personal saving can be negative if personal outlays exceed disposable personal income. This means that individuals or households are spending more than they earn after taxes, often by drawing down existing savings or by increasing their debt. A negative personal saving rate indicates a dissaving trend.

How does personal saving relate to investing?

Personal saving is the precursor to investing. Once individuals have saved a portion of their income, they can then choose to invest those funds into various financial assets, such as stocks, bonds, or mutual funds, with the goal of growing their wealth over time. The decision to invest follows the act of personal saving.