Is Household Saving Bad for the Economy?

What’s good for us versus what’s good for the economy

Author sailing in Key West, home that has been sold, students celebrating graduation

I recently asked a group of writers, “Why do we save?” Here are some of their responses:

• So, we can pay big honking dental bills when they come up and fix the catalytic converter on my car so I can idle it in winter without gassing myself

• Protecting our inner life from the outside storms

• For paying high medical bills

But one talked about how her family pulled itself out of debt. This is called negative savings. They were able to save to help their kids with school and assistance and to have money for retirement.

Some of the group members were thinking short term—having funds to pay for emergencies. The last one was thinking long term—having money for later in life.

In this post we’ll look at and why how households save.

Household saving doesn’t add to the economy directly

Household spending is good for the economy. As spending (Consumption) rises, so does GDP.

As spending rises, producers make more of what we need and want. Then they hire more workers to do so.

But individual households need to save money. When we save money, by putting it aside or paying down debt, then GDP loses that amount of consumer spending.

That’s not necessarily a bad thing.

Why do we save?

We need funds for emergencies, for family vacations, or for the down payment on a new home.

For example, my husband and I set aside funds to pay the down payment for a new home. In 2021, that meant 20 percent of the price of the house.

(Keep this in mind when you’re house hunting.)

We also needed funds for closing costs, taxes, and all the other fees that come with buying a new home.

Some households put money into savings for college for themselves or their kids.

And many of us save for retirement.

As you save money, you build wealth. Traditionally, Americans build wealth in three ways:

1. By putting money into a savings account, money market funds, and short-term certificates of deposit

2. By putting money into equities (stocks) and bonds

3. By building equity in our homes

But I started adding one more item when I was teaching: (4) the money we put into our education beyond K-12. In earlier posts, I’ve talked about how spending time going to college or learning a skill or trade improves your stock of human capital.

Let’s look at each in turn.

Why we build wealth

We also build wealth to take care of us when we aren’t working.

According to the Centers for Disease Control (CDC), one in four Americans can expect to be disabled, permanently or in the short run, during their lives. As we get older, accident or illness leaving us disabled is more likely.

If you’ve got adequate savings in easily accessible funds (M2 money), then you can protect yourself against a sudden drop in income from illness or injury.

Long-term disability insurance is another option for full-time employees.

Retirement Savings

Most of us expect to retire. We know that our Social Security income won’t be enough. This is where long-term savings comes in.

For longer-term savings, often called investing in the finance industry, most Americans put their money into the stock market and their houses.

IRAs, Roth IRAs, and 401(k)s are popular ways to save for retirement.

They have the advantage of reducing your current taxes. You’ll likely be in a lower tax bracket after retirement when you get that income.

If you’re lucky, your company matches part of your retirement savings.

As an employee of the state of Georgia, I was required to save five (5) percent of my salary. I didn’t complain because the matching plan was very generous. In contrast, my husband’s company only started partial matching the year before he retired.

Admittedly, he always worked for high-tech start-ups.

In tomorrow’s post, we’ll finish looking into savings. We’ll also discuss why savings can be good for an economy.

Thank you for taking the time to read this,

Nikki