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    Household vs Economy: Importance of Saving

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    How important is saving for a household and the economy? How much should be saved?

    I need at least 300 words and at least 2 citations (references) do not use wikipedia, this is MBA level.

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    Solution Preview

    The short answer is that savings is extremely important for not only households, but for businesses, institutions, and any form of model requiring financial backing. Here is how it breaks down:

    The principle involved is time value of money. If we proceed to save (essentially pay ourselves as though we were an expense or a debt), then we engage the principle of future value. Future value states that money earns money on the money saved and invested (even if we are simply investing in a savings account with our local bank). The benefit to the saver is that the money being saved and invested earns additional money through the payment of interest and/or dividends to the saver. The result, for example, is that $1.00 saved and invested at 10% for 10 years is worth approximately $2.64 at the end of the 10 year period --- which means that our savings have grown approximately 260% simply by allowing it to be used within the economy for other investment opportunities. (Now if we continue paying into an account which allows this to grow, keep in mind that our long term return will grow exponentially due to ...

    Solution Summary

    This response provides a discussion of how and why savings occurs within the economy, as well as the impact of savings accounts on the finance industry, and banks in particular. It also provides an understanding of why there should be a minimum level of savings, instead of a total investment mentality.