The Pros And Cons Of Saving

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National saving includes public and private saving. Household saving typically constitutes a major part of private saving compared to private corporations (Gersovitz, 1988; Rehman, Bashir, & Faridi, 2011). Saving is an important way to improve the well-being of household. It allows households to smooth consumption in case of high income volatility and increase the opportunity to invest in physical and human capital (Ashraf et al., 2003). For households, the tradeoff between current and future consumption results in saving (Sturm, 1983). There are numerous motives leading to the decision of saving. For instance, saving for retirement aims at financing future consumption when income decreases or becomes zero (life-cycle). Also, households save when there is uncertainty about future income (precautionary saving) or when they intend to leave bequests (Sturm, 1983; Gersovitz, 1988). Additional motives include, improvement (increasing consumption) or intertemporal substitution (enjoying interest), investing in business or accumulating down-payment of durables (Browning & Lusardi, 1996; Coleman, 1998; Karlan & Morduch, 2009). Income is identified as a significant determinant of saving. Early saving theories that…show more content…
A potential explanation is that a shift in household’s income to higher levels will introduce households to modern consumption opportunities leading to a decreasing saving rate (Mikesell & Zinser, 1973; Liu & Hu, 2012). The implication of Keynesian theory is that low income households save lower ratio of their income compared to high income families. Different theories, that attempted to explore the relationship between income and saving, were contradictory. For instance, it was found that the poor consume at their subsistence level, yet they often have little saving to smooth consumption in case of income shocks (Schmidt-Hebbel, Webb, & Corsetti, 1992; Meghir,

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