Savings and Investment
Saving defers consumption from the present to a time in the future. Therefore, when thinking about the reasons for households to save, we’re really thinking about why households are deferring consumption rather than consuming now.
One important reason for saving is known as the ‘precautionary motive’ – perhaps more commonly known as ‘saving for a rainy day’. This involves building up savings to provide for unexpected events and bills. If you have no savings and an unexpected event with financial consequences occurs (such as a car being damaged or someone becoming too ill to work and losing their income), then there are only three alternatives:
One
Receiving a pay-out from any insurance taken out against such an unexpected event
Two
Borrowing money (from family, friends or financial institutions) to pay the unexpected bills
Three
Defaulting on any commitments, for example not making payments on a car loan or a mortgage, with the consequent risk of repossession and negative impact on future credit ratings.
