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Increase Your Propensity to Save - October 2012

The term “propensity to save” refers to one’s natural inclination or characteristic disposition to save. The “average propensity to save”, on the other hand is the proportion of income which is saved, also known as the “savings ratio”. This is  economics jargon that refers to the proportion of income which is saved, rather than spent on goods and services.

The savings ratio (or average propensity to save) is usually expressed for household savings as a percentage of total household disposable income, which is the money left after income tax has been accounted for. So yes, you too have an average propensity to save and governments, economists and banks are very interested in it.

This measurement may seem to have little relevance to your day-to-day financial reality but to a number of organisations, the amount that you save and spend can determine national economic policy. When there is talk of “consumer confidence”, an accurate measurement of average and marginal propensity to save and to consume typically come into play.  What makes them so important is that they are measuring what you are doing with your income, especially your discretionary income. One of the biggest drains on discretionary income is debt. No matter where you live, or how much you earn debt is an obligation that cuts into your financial freedom.

Generally, there seems to be an increase in the awareness of the ¬importance of debt management, with people taking positive action by sitting down and getting to grips with their ¬financial reality. It all starts by asking yourself simple questions like:  do I know what my financial goals are?  Do I use my credit card and pay for purchases later or do I save up for things I really want? Do I have a spending plan, and do I know where my money goes each month?  You can immediately improve your financial outlook by strengthening your savings behaviour and by committing to save a larger proportion of your discretionary income.
 
Making changes in your own spending and savings behaviour is guaranteed to improve your financial outlook.  You are bound to encounter problems, and the only way to meet your daily financial challenges successfully is to live within your income, and when you do receive those extra few euros, bank them as a hedge for future expenses. To be successful in improving your savings behaviour, you need to be savvy enough to think about both the short and long term - to balance what you want now with what you want in the future. Financial experts describe savings as “deferred spending”, meaning very euro you place in your savings will be actually be spent at some point in the future.

Many would like you to spend more of the money you earn now. The temptation to do so will always be strong. However, your family is looking towards a greater sense of security that a regular saving habit can provide.   While you may not consciously think about your propensity to save, being proactive in your saving as well as in your spending pattern is highly recommended. After all, any effort you put in to increasing your propensity to save will benefit your personal security and that of your family.