How to calculate savings ratio

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How to calculate savings ratio
The savings ratio can gauge the macroeconomic health of a nation. (rainy day savings image by Pix by Marti from Fotolia.com)

The savings ratio, an often-quoted economics statistic that reflects the average propensity of a nation's consumers to save money, is used for a variety of analytical purposes, including gauging the overall economic health of a nation. The ratio differs substantially between nations and over time.

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Calculation

The savings ratio is expressed as a percentage and is computed by dividing average household savings by average household disposable income. Both of these data points are typically computed by governmental statistical organisations. In the United States, the Bureau of Economic Analysis, part of the Commerce Department, gathers and reports this data. It is released monthly. Although the concepts remain similar, the exact definitions of each component may differ slightly from nation to nation.

Household Savings

Household savings reflect the portion of household income not spent on current consumption and is instead invested in capital markets or used to purchase real assets. Investments in capital markets include stocks, bonds, bank accounts and even the colloquial hiding money under a mattress. Capital gains and losses are not included in household savings. The purchase of real assets refers primarily to buying personal homes, but can also include vacation and rental property purchases.

Average Household Disposable Income

Average household disposable income is equal to total income less current household taxes. Note that the economic definition of disposable income, which includes payments for food and personal residence, is different than the lay definition of disposable income, which excludes such items. Current household taxes include only taxes on household income and real and personal property taxes and do not include taxes levied on consumption (such as sales tax) or taxes for Social Security.

Significance

The savings ratio is extremely important to the long-term overall economic health of a nation. Growth and increases in productivity are made possible only through sufficient levels of investment. This investment must be financed through savings. Household savings is not the only source of national savings. Businesses contribute to national savings as well. However, since investments in business comprise a significant portion of household savings, the two ratios express some degree of long-term correlation.

Warning

Although a higher savings ratio, and thus increased household savings, is good for an economy's long-term health, it can be harmful in the short term. Household spending, the inverse of household savings, is an important component of a nation's gross domestic product, the measure of goods and services produced in a nation. In many nations, including the United States, it constitutes the largest component. Increased saving results in reduced immediate consumption, which limits a nation's immediate production.

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