Topic 3.1 · Saving for Future Purchases
Saving for Future Purchases
Why people save and what gets in the way, how inflation and policy affect savings, and how to choose among savings vehicles.
25 min read Reviewed
Learning objectives
- 3.1.ADescribe reasons consumers save, and identify barriers to saving.
- 3.1.BExplain how PESTEL factors can impact the value of savings and incentives to save.
- 3.1.CDevelop or evaluate a savings plan.
Objective statements © College Board, quoted from the Course and Exam Description.
Most people earn income by working for a business, nonprofit or government. Others earn it from self-employment, rental property, government programs, investments or retirement accounts. Whatever the source, part of income can be saved.
Why people save
- Big future purchases: a car, a home, college tuition
- Emergencies: job loss, illness
- Retirement income
Savings are a personal asset and may earn interest. How much interest depends on the rate, the amount saved, the type of account and economic conditions.
Incentives and barriers
| Incentives to save | Barriers to saving |
|---|---|
| Automated savings plans (save first, automatically) | Inconsistent income |
| Retirement savings plans (tax savings) | Recurring expenses that exceed income |
| Health savings accounts (tax savings on health costs) | Instant gratification, lifestyle inflation, impulse buying |
How PESTEL factors affect savings
- Economic: a weak economy can cut income, and a strong one can raise the cost of living. Either can squeeze savings.
- Inflation erodes purchasing power: the same dollars buy less later, which can discourage saving.
Key terms
- Saving
- Setting aside income for future use. Savings are a personal asset and may earn interest.
- Interest
- Payment for the use of money. Savers earn it and borrowers pay it.
- Inflation
- A general increase in prices, which erodes the purchasing power of money and savings.
- Purchasing power
- The quantity of goods and services a given amount of money can buy.
- Lifestyle inflation
- Increasing spending as income rises, which leaves little extra to save.
- Savings account
- A federally insured deposit account that typically pays interest. Fees and minimums vary by institution.
- Money market account
- A federally insured account that may require a larger minimum and charge higher fees, but may pay more interest and offer easier access to cash.
- Certificate of deposit (CD)
- A federally insured deposit that typically pays higher interest but locks funds for a set term (usually 1 month to 5 years).
- Checking account
- A federally insured account designed for frequent transactions. It pays little or no interest and may charge fees.
- Automated savings plan
- A plan that moves a set amount into savings each pay period.
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