The concept of savings
Saving is income not spent, or deferred consumption. A method of saving includes putting money aside in, for example, a deposit account, a pension account, an investment fund, or as cash. Saving also involves reducing expenditures, such as recurring costs. It is any income not used for immediate consumption.
Savings is a part of income that is not spent. It refers to all or part of income which are not spent immediately but reserved for future purposes.
In terms of personal finance, saving generally specifies low-risk preservation of money, as in a deposit account, versus investment, wherein risk is higher; in economics more broadly.
Types of savings
- Government Savings: This is the type of savings kept by the government of a country. Government can save through budget surplus and many other ways.
- Personal Savings: This is the savings kept by an individual for personal reasons.
- Corporate savings: It refers to the type of savings kept by companies and other business organizations.
Factors that determine Personal Savings
1. Rate of interest: A higher rate of interest will encourage people to save.
2. Political stability: People are more likely to save when there is political stability. But there is little or no savings in times of wars or inter-tribal.
3. Size of income: As the income of a person increases, his ability to save equally increases. In other words, the higher the income, the higher the tendency to save, the lower the income, the lower the tendency to save.
4. Presence of financial institution: People are more likely to save if financial institutions like banks and other financial institutions are available.
5. Sense of responsibility: People may decide to save for one or more major reasons based on their income. A person with a high income who decides to save has a high sense of responsibility.
6. Government policy: Government can influence people’s attitude to saving in several ways. Personal savings can be encouraged through the rate of interest and income tax concessions.
Reasons for Savings
1. Capital formation: People may decide to save in order to raise capital, which can be used to set up a business outfit.
2. For unforeseen contingencies: People may also save in order to meet up unforeseen and unexpected contingencies such as accommodation problems, retirement, sickness, retrenchment etc
3. Acquisition of assets: People also save to enable them acquire certain assets.
4. Accumulation of wealth: People do embark on savings in order to gather or accumulate wealth.
5. Provision for future purposes: Some people save deliberately for future purposes, e.g. old age, education of children.
6. Acquisition of social status: Some people embark on savings in order to be wealthy, which can lead to or boost their social status in the society.
Concept of Investment
Definition: Investment may be defined as expenditure on physical assets which are not for immediate consumption but for the production of consumer and capital goods and services.
Investment has two- related meanings:
(i) It could mean the actual production of real capital in economic theory such as building of new factory, purchase of new vehicles.
(ii) It could also mean, in financial term, the deposit of money in bank, purchase of stock or government securities, etc
Types of Investment
1. Individual Investment: This is the type of investment embarked upon by a house hold or an individual in order to increase his income and raise his standard of living. Examples include investment in houses, motor vehicles.
2. Corporate Investment: This includes investment by companies and other organizations with the sole aim of making profits. Example include, Investments on plant and machinery, buildings etc
3. Government Investment: Government Investment includes the setting up corporations with the sole aim of providing essential services rather than making up profits, e.g. provision of electricity, water, health care services etc.
Factors that Determine Investment
The following factors determine the factors of Investment
1. Rate of Taxation: Higher taxation on one’s income reduces investment and vice versa.
2. Interest rate: High interest rate charged by banks discourages borrowing, which leads to low investment while low interest rate encourages borrowing leading to high investment.
3. Level of Income: The higher the income earned, the higher the level of investment and vice versa.
4. Profit earned: High profits earned by individuals or firms do encourage investment while low profits discourage it.
5. Changes in technology: The level of investment is greatly influenced by changes or improvements in techniques of production through inventions and innovations.
6. Political climate: Investment thrives in a politically stable environment while investment is reduced in places with political stability.
7. Business atmosphere: Investors are more interested in investment in a stable economy than those with economic stability.
Test and Exercise
1. The part of income that is not spent but reserved for future uses is simply referred to as (a) income (b) savings (c) investment (d) consumption.
2. The type of savings kept by business organizations and companies is known as (a) corporate savings (b) personal savings (c) government savings (d) individual savings.
3. The expenditure on physical assets which are not for immediate consumption but for production of consumer and capital goods and services is (a) savings (b) consumption (c) investment (d) income.
4. Some of the major factors that determine investment is all of the following except (a) savings (b) profit earned (c) change in technology (d) ethnicity.
5. Type of investment embarked upon by a household or an individual is to increase their income is (a) government investment (b) corporate investment (c) individual investment (d) all of the above. https://passnownow.com/classwork-support/
