Private Saving

Published Jan 16, 2023

Definition of Private Saving

Private saving is the amount of money that households and businesses save out of their current income. That means it is the difference between their disposable income and their consumption. Or in other words, it is the amount of money that private individuals or companies save for future use. If the government saves money, it’s called public saving, and all the saving in an economy combined is referred to as national saving.

Example

To illustrate this, let’s look at the example of a family of four. They have a combined disposable income of USD 4,000 per month. Out of that, they spend USD 3,000 on rent, food, and other necessities. That leaves them with USD 1,000 of disposable income. Now, if they decide to save USD 500 of that money, their private saving is USD 500.

Why Private Saving Matters

Private saving is an important indicator of economic health. It is closely related to the level of economic activity in an economy. When people save more, they spend less, which can lead to a decrease in economic activity. Similarly, when people save less, they tend to spend more, which can lead to an increase in economic activity.

On the other hand, however, savings are needed for banks to create money, so higher if private households and companies save more money, the commercial banks can lend out more money, which increases the supply of loanable funds, and vice versa. Thus, private saving is an important factor for policymakers to consider when making decisions about economic policy.