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As individuals, it is important that we understand the way in which saving money can affect our long term standard of living. However, it is much more difficult to appreciate the way in which an increase in national savings will affect the entire economy.

From a personal perspective, increasing your savings can help you to purchase larger assets. For example, the average home in Victoria costs in excess of $300,000. Without savings, no bank will lend you the money that you require to purchase an asset like this. As a result, if you don’t save money when you are young, then it is possible that you will never gain access to the money necessary to own a home.

You should also consider the impact of savings in the long term. Effectively, saving money could be defined as the process of delaying consumption – we will still spend the money, but that spending will happen at a later date. At some point in the future, you will probably want to retire. When that happens, your income will stop. If you have not saved enough money to pay for your retirement, then during that phase of your life you will become dependent on welfare payments. When that happens, your standard of living will fall. (If you retire at 55, then you will need to pay for food, housing and entertainment for thirty years – that will require significant savings!)

There is also a broader impact associated with saving money. When we put money in the bank, that money is made available to others in the economy. Banks lend out the money that we deposit in the hope of making a profit. If more money is made available, then the supply of money has increased. Following the theory of supply and demand that you have already learned, when the supply of money increases the price will fall. The price of money is the interest rate that banks charge when we borrow it - an increase in national savings will help to ensure that the pressure on interest rates is reduced. Lower interest rates help to ensure that the economy continues to expand.

There is one other very important consequence of higher levels of savings. Following on from the previous point, when interest rates are lower people are encouraged to borrow money. If there are sufficient domestic funds available (ie we have saved enough money) then the banks will not need to borrow money from overseas. It follows that having a high level of domestic savings helps to ensure that our net foreign debt is maintained at a lower level.

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