Question

1) What is savings and its relationship to the economy?

2) What is the savings rate in the U.S. so low?

3) How can Americans start to increase their savings rate between 10-15% of their income?

Answer 1

Firstly I would like to explain the meaning of saving with example:

1) Meaning of Saving

Savings is the money a person has left over when they subtract their consumer spending from their disposable income over a given time period. Savings can be used to increase income through investing.

For example, Roma’s monthly paycheck is $5,000. Her expenses include a $1,300 rent payment, a $450 car payment, a $500 student loan payment, a $300 credit card payment, $250 for groceries, $75 for utilities, $75 for her cellphone and $100 for gas. Since her monthly income is $5,000 and her monthly expenses are $3,050, Roma has $1,950 left over. If Roma saves her excess income and faces an emergency, she has money to live on while resolving the issue. If Roma does not save her extra money and her expenses exceed her income, she is living paycheck to paycheck. If she has an emergency, she does not have money to live on and must secure payments for her bills.

Relationship between saving and economy

From a theoretical point of view it should exist a positive relationship between domestic savings and economic growth because, on the one hand, the increase in savings could stimulate economic growth, but on the other hand, the economic growth could stimulate the growth of domestic savings.

According to Tinaromm:

Tinaromm (2005) studied the relationship between savings and economic growth in North Africa using a Vector Error Correction Model for 1946-1992. Hec concludedthat private saving has both direct and indirect effects on economicg growth In his view, the direct effect of savings is through private investment. He also showedthat economic growth has a positive effect on the private savings rate.

Mohan (2006) investigated the causality relationship between savings and economic growth in 13 countries with different income levels during 1960- 2001. Thecountries were divided into four different income levels: low income, less than the average, more than the average and high income. He used a Granger Causality Test and showed that the causality relation and direction differs among countries depending on income levels. In general, the Keynesian theory of savings as a function of growth was confirmed in countries with low and less than average incomes while the Solow hypothesis that savings is a determinant of economic growth was confirmed in countries with high and more than average incomes.

Najarzadeh, Reed & Tasan 109

Hemmi et al. (2007) studied the relationship between precautionary savings and economic growth. They used an Autoregressive Conditional Heteroskedastic (ARCH) model with annual data from 1955 to 1990. They concluded that increased savings can have a favorable impact on sustainable growth. They also found thatstronger shocks on precautionary savings result in the higher levels of savings as.

They concluded that savings have a positive effect on economic growth. ... The results indicate that there is a two-way relationship between savings and economic growth. His results also showed that an increase in savings and capital accumulation will lead to higher income and economic growth.

2) Reason for low saving rate in U.S.

Two big reasons I can think of.

First, most people under 70 have never known want or adversity. They have been spoiled by what they believe to be perpetual prosperity and live payday to payday, not because they don’t make good money but because they spend foolishly. Those of us who remember what it was like before the boom brought on by World War II know what bad times are and have lived our lives expecting things to fall apart. As a result, savings have always been a priority, but we are a minority. Most of the last 50 years my wife and I not only both worked, but saved 20% of our income.

Secondly, interest rates are so low there are better things to do with money than stick it in a bank. When my wife and I were newlyweds, interest rates were 12.5%. Today interest rates are from below 1% to around 2%. In the late 60’s and early 70’s both of us together were making a total of $7,000 a year so it was a lot harder to save.

In the same amount of time our home rose in value from $17,500 to $115,000. Another house we bought 8 years ago for $70,000 was appraised at $129,000 by the time we paid off the mortgage. That is an 80% increase in 8 years and in the current market we could sell it in a heartbeat. A person would be far wiser to pay off all debts and credit cards and pay off the principle on their home before they started putting more than just enough to meet emergencies in a bank. But no matter how they do it, a person needs to be constantly accruing a modest measure of wealth. In today’s economy there is seriously no excuse not to.

3) Americans start to increase their savings rate between 10-15% of their income

often recommend saving up $1 million before you retire. While that's more than enough for some, others may not find it sufficient, thanks in part to longer life expectancy and disappearing pensions. Still, it's a helpful rule of thumb as you begin to plan for your retirement needs.

To get there, financial planners suggest saving anywhere between 10% and 15% of your gross salary. To make the process easier (and less expensive), you'll need to get started early — or earn a substantial salary later on. In many situations, that means bringing in much more than $61,372, the median household income in the America.

Hope this will help you ?