Individuals must decide whether to spend or save their income based on a variety of factors. Cultural traditions, personality, expectations of future income, specific spending plans, tax policies, availability of credit, current income level, and age all influence the spending versus saving decision. The two most important factors are generally found to be level of income and age, as people tend to save more of higher incomes and save more during middle age for retirement than when young or in retirement.

1. Decisions to Spend or Save Angela Green

2. Spend or Save? The individual and either spend or save their income. This can be expressed in the following equation: Y=C+S A rise in consumption causes a reduction in saving and vice versa There are a variety of factors that influence the decision about whether to spend or save

3. Cultural Factors Traditional cultural factors may influence the spend/save decision For example, in some East Asian countries, people tend to save more, and also, previous generations tended to save more than they do today

4. Personality Factors Individuals sometimes spend or save based purely on their personality Some people are more cautious and save in case of emergencies, while others rather spend money and enjoy the benefits of their income immediately

5. Expectations of the Future Individuals look to the future to decide whether it it wise to spend or save their income People who expect their income to rise in the future are less likely to save now

6. Specific Future Spending Plans If an individual desires to make a major purchase, they may be more inclined base their spending/saving habits on that desire Some may save more if they are planning a major expense in the future (car, holiday)

7. Tax Policies This is beyond the individual. Governments often create tax policies to encourage spending or saving based on the state of the economy The tax system can make it more attractive to save (such as through lower taxes on superannuation savings) or to spend (abolition of consumption taxes)

8. Availability of Credit When credit is available to the individual, they are more likely to spend Also, individuals are less likely to save if they feel confident that they will be able to access credit easily in the future

9. Two Most Important Factors Level of income Age

10. Income As income rises, people tend to save a higher proportion of income (APS rises, APC falls) and vice versa Also, for each extra dollar earned:Marginal propensity to consume (MPC) (slope of consumption function)Marginal propensity to save (MPS) So, MPC+MPS=1

11. Age When people are young and lower skilled, they earn lower incomes and spend most on consumption. Middle-aged people tend to save more for their retirement, but spend more of their income on consumption once reached retirement.

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