Elementary Theory of Income Determination – Concept of Savings

Savings may simply be defined as that part of income which is not spent. In other words, it refers to all or part of income which are not spent immediately but reserved for future purposes. Money which is saved constitutes a withdrawal from the circular flow of income. It can only come back to the circular flow of income through investments. Factors which determine personal savings are as follows:

1. Rate of interest: A higher rate of interest will encourage people to save
2. Political stability: People are more likely to save when there is political stability. But there is little or no savings in times of wars or inter-tribal crises.
3. Size of income: As the income of a person increases, his ability to save equally increases. In other words, the higher the income, the higher the tendency to save while the lower the income, the lower the tendency to save.
4. Presence of financial institutions: People are more likely to save if financial institutions like savings banks and other financial institutions are available.
5. Sense of responsibility: People may decide to save for one or more major reasons based on their income. A person with a high income who decided to save has a high sense of responsibility while one who refuses to save has a poor sense of responsibility.
6. Government policy: Government can influence people’s attitude to saving in several ways. Personal savings can be encouraged through the rate of interest and income tax concessions.

reasons to save

People may decide to save in order to raise capital, which can be used to set up a business outfit. You can practice this to meet unforeseen and unexpected contingencies such as accommodation problems, retirement, sickness, retrenchment, etc. Of course you keep up to acquire assets and accumulate wealth. More reasons are: for the provision for further purposes such as old age, education of children and the acquisition of social status. In view of this, knowing the various types of savings is vital and there are three of such, namely: personal, corporate and government savings. The personal savings is such which is kept by in individual for personal reasons. While the corporate refers to the type of savings kept by companies and other business organizations. They embark on this practice if profits are high, when taxation is low or for other critical reasons. The Government savings is the type kept by the government of a country. Government can save through budget surplus and may other ways. Savings encompasses all categories or level of people from individuals to corporate societies/organizations/companies and even to the government. A healthy habit of saving is essential for the development of a nation’s economy.

Ludivina Leveto

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