Average Propensity to Save

Answer 1

In economics there is a term, Average Propensity to Save (APS). This is sometimes referred to as the savings ratio. It is roughly defined as the portion of income retained after taxes and spending on consumption. Why is this an important factor that economists think is worth tracking? The answer lies in the fact that households comprise a large part of the economy, since they’re responsible for a good portion of consumption they do a lot of the actual driving of the economy. If times get tough and the average household has little to no savings, then consumption is going to go way down, because consumers have little to nothing to draw on.

So it’s instructive to consider that, with all that is going on in Europe right now, that Euopean households have historically had much higher savings ratios than those of their American counterparts. So even though times are getting tough in Europe, with rioting and rebellion happening in the streets as a direct result of the countries’ financial policies, those concerned citizens most likely have more in savings than you or I do. In fact in 2002 households in Eurozone countries had an Average Propensity to Save of 9.6%. When compared to the U.S. household number of 2.4% - it’s clear that we’re not too far away from mass financial panic.

You can avert financial disaster in your own household by beginning to increase your APS. Many in our culture are reluctant to save any money, and it’s no wonder how much we’re inundated with constant advertising telling us we’re nobodies unless we have the latest and fastest electronic gadgetry. Many people think that they’re ok because they’ve got insurance in place to cover losses in the event of certain contingencies. I argue that insurance is a nice financial tool but nothing beats a fat cash reserve in an emergency. You get to decide when withdrawals are made; there’s no filing of claims and waiting for them to be approved and then making appeals if they are denied. Cash lets you call the shots, so work to increase your Average Propensity to Save – it could mean the difference between panic and peace.