Most people understand the importance of saving for their own financial well-being, but not everyone realizes their savings impacts the entire economy. During hard economic times, it’s nice to have money in your savings for yourself and your household. But a high savings rate overall can speed up the economic recovery of the entire country. Regardless of the state of the economy, saving money is always a wise move.
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Savings are the funds that remain after subtracting a person’s consumer spending from their disposable income over a specific time period. Savings is what’s left over after all bills and commitments have been paid for an individual or household. The Federal Deposit Insurance Corp. (FDIC) Money Smart materials provide information on the importance of saving, tips for saving and various tools to help consumers reach their financial goals.
Why savings are important to economic growth
Savings are an important source of economic growth. Saving money can result in higher living standards and a more stable economy.
Long-run economic growth
A higher saving rate will typically result in higher levels of economic output in the long run. Research shows countries with higher rates of savings have demonstrated faster economic growth than countries with lower rates.
A person’s savings are typically loaned to businesses to finance new investments when they save a portion of their income. For instance, a person’s 401(k) is a savings account for their post-retirement consumption, but prior to retirement, these funds are typically invested in a variety of businesses through the purchase of stocks and bonds. One of the key factors affecting long-term economic growth is the overall level of investment.
Promote job creation
Stronger economic growth leads to new job opportunities. Formerly unemployed or underemployed workers have the chance to increase their take-home pay and improve their ability to meet their financial obligations thanks to those opportunities.
Personal savings provide consumers with safety nets to help them weather unexpected costs without getting further into debt. The ability to cope with financial hardships can help the economy recover faster. The stronger individuals are, the better the economy will be overall.
Saving money helps to reduce debt. According to 2022 data from the Federal Reserve, the collective debt burden of all Americans is $16.15 trillion. Housing debt accounts for 72% of that total debt balance. Unfortunately, housing debt is an indicator of recessions. If households pay more for a depreciating asset, it’ll drag down the entire economy.
If households have adequate savings, the government doesn’t need to rely on stimulus spending to promote economic recovery during hard times. During the pandemic, people curbed their spending. People struggled to pay rent and many lost their jobs. Although the stimulus helped Americans stay afloat, economists agree the stimulus payments received through the American Rescue Plan contributed to the inflation being seen today.
Typically, governments use additional sovereign debt to pay for economic stimulus packages they offer to their citizens, which will eventually have to be paid off by future generations. One interpretation of this is that savers will eventually have to bail out non-savers.
Risks of saving too much
From an economic standpoint, it’s actually possible to save too much money. Saving more money results in consumers spending less, which is bad for the economy. A decrease in demand can lead to deflation, which is when prices drop. Falling prices may seem great, but it has a significant negative impact on the economy. Deflation results in lower business profits, and some businesses may choose to reduce costs by laying off employees, which drives up employment.
Savings vs. debt
According to a Bankrate poll, only 50% of Americans have more emergency savings than they do debt. People without savings tend to turn to credit cards or high-interest loans in an emergency. Taking on more debt only makes things worse.
Home equity lines of credit (HELOCs) are lines of credit that allow consumers to tap into their home’s equity as needed. Although they may seem convenient, they’re potentially very dangerous. If someone can’t make the payment for whatever reason, they risk losing their home in foreclosure.
Your Money Matters
Saving money helps you prepare for a financial crisis or hardship and helps the entire economy. Although Americans’ personal savings can affect the economy, the state of the economy also has a direct impact on their ability to save. Inflation means things cost more, which results in less passive income.
How does the economy benefit from savings?
Over time, a higher rate of saving will translate into more physical capital, enabling the economy to produce more goods and services.
How does personal savings help the economy grow?
When people save, they become more stable. An increase in the security of households helps support long-term economic growth.
Why is saving and investing important in an economy?
Savings are used for investments. An increase in investments typically boosts an economy. Basically, increased savings can support increased investment levels and stimulate the economy.