Saving is affected by many external and internal factors, which contribute significantly to generating variable conditions that control the process pattern.
In the following article, a general tour of the most important factors affecting the savings process.
Savings
Saving leads to more growth in various fields of development, as new investment leads to stability and economic recovery.
Saving helps governments finance their development projects, achieve added values in the economic structure, limit price hikes and increase the supply of goods and services, reduce unemployment, improve the level of services, and reduce luxury consumption and extravagance, which achieves a kind of social stability. Savings in the modern economy can be divided into two parts:
- voluntary savings
- compulsory savings
as voluntary savings is free savings that an individual does voluntarily and in response to his will and desire, while compulsory savings is savings that individuals are forced to do as a result of legal requirements, government decisions, or corporate decisions.
Savings equation
The saving function is considered an increasing function in terms of the interest rate, because the relationship between saving and the interest rate is direct, that is, an increase in the interest rate increases saving and vice versa, and it can be represented mathematically as follows:
S = F(I)
Where :
- I: interest rate
- S: saving
- F: function
How is saving affected?
Objective factors: (including income level, price level, currency stability, tax policy, interest rate).
Subjective factors: (which are factors related to people in terms of their social classes, customs and traditions, as well as religious beliefs that forbid dealing with usury, for example).
- As for the social classes, we find that the rich class has no incentive to save because it prefers hoarding
- As for the middle and working class, they resort to saving in order to improve living conditions and face future crises such as accidents
- As for the government sector, the state resorts to several policies to raise the volume of savings, such as distributing incomes and changing consumption tendency.
Saving is highly influenced by the idea of time preference as the majority of people tend to prefer immediate consumption over deferred consumption. The more conscious and intellectually sophisticated a person is, the less he prefers the present and the more he tends to save.
Saving is affected by the amount of income in society and the fairness of its distribution. In general, the soft relationship between the size of total income and the marginal propensity to save is noted, and the inverse relationship between the fairness of income distribution and the marginal propensity to save.
The most important saving determinants
Saving has many determinants, most notably:
1. income
Individuals, regardless of their affiliation, distribute their income between consumption spending and savings.
The higher the income, the higher the consumption spending in order to obtain goods and services, and they save the rest of it, and this is what appears in many studies related to savings.
2. The amount of wealth
The concept of wealth is linked to those in-kind and financial assets, as well as the human element, which is considered part of the wealth, according to Friedman, who showed the importance of the human element in influencing the behavior of some economic variables such as savings, demand for money......... etc.
3. Inflation rate
Economists consider that inflation is one of the factors that greatly affect saving, as the general rise in prices affects the purchasing power of income.
4. Financial Status
The development of the financial system is an important condition for advancing economic development.
This development will lead to an increase in savings rates and the creation of an appropriate channel for the flow of these savings towards investments.
5. Interest rate
The individual's saving allows him to obtain a return that depends on the form of the financial assets that he keeps.
He may get interest, dividends, or capital gains when the prices of the securities he owns rise in the stock market.
This means that the main variable for increasing savings is the increase in interest rates or the rate of return for savers.