CHAPTER 4:

THE RATIONALE OF
THE SAVING DECISION

Group 4
Johana Bai Usop
Mylene Neri
Phoebe Jill Madalinsan
Asrea Yasser
Isabelle Joy Ponce
 Introduction
All societies have wealth, however ownership and distribution
of such wealth vary among societies with different economic
systems. For instance, under socialism the means of
production belong to the public. And no one has the right to
use the means of production (like land, equipment, machine or
transportation) for personal gain or other selfish motives.
Wealth is anything which has economic value. This means it
has a price - and it also generates prestige and power.
 THE NATURE OF WEALTH
• Considering the fact that saving is the means by which wealth
may be accumulated, it will be logical to explore first the
meaning of the term wealth. It may simply refer to "the
difference between the value of assets and that of liabilities"
(Ibid.) Another definition of the term wealth may be "as those
5things that are useful, scarce, material, and transferable"
(Castillo, 1969). Still another definition states that it is "value
of the households net equity in the things the household owns"
(O'Bannon, et al., 1972).
 3 essential element of wealth deduced
from the last definition are:

1. It must have economic value, i.e., market value;

2. It connotes ownership; and
3. It may refer to the valuable things that may be formally
"owned" by an individual, which are greater aggregate value
than the total wealth holdings of the said individual.
 Effects on Wealth
1. Obtaining real or financial assets
2. Settling or retiring existing det
3. Retaining or accumulation money (cash)
Consumption Alternatives

1. Barrowing to sustain deficit spending

2. Utilizing retained earnings or past accumulated savings
3. Transforming real cr financial asset into cash.
 Reasons for saving

According to (O’Bannon et al 1972) The motivation for saving

is numerous, but there are two things are factually undeniable
namely:
a. Saving is a deliberate/planned activity.
b. Saving is an unplanned activity or a product of
unexpected event.
 The specific motives are as follows
(Castillo, 1949)

1. Save while working, because no one can continuously work to earn a

living for the rest of his life.
2. Invest for you insurance to ensure that you are financially secure to face
any type of life problem in life. Only those “Bahala Na” will leave the
future unchartered and unprovided.
3. Apply insurance policy in saving money. A contract between
you and your insurance company it lays out what’s covered and
what isn’t and other details of your agreement. Its is another
form saving.
4. Saving is good to enjoy fully the retirement period in
comfort and leisure.
5. Deposit saving in the bank gets an interest, this is called
expected yield-the profit of your investment.
6. Force saving to save because no other alternatives
but to save. Hence, the excess or surplus is
clearly going to be saved.
 Ethics on wealth
As earlier stated positive saving increase wealth. Said increase
may be effective in three ways depending upon the manner of
utilizing income balance of positive saving such as:
1. Obtaining real financial assets
2. Settling or retiring existing debts and
3. retaining or accumulating money (cash)
 Now, if saving is negative its revers the whole
idea enunciates above. Consumption is
sustained in any of the following alternatives:

Now, if saving is negative its revers the whole idea enunciates above.
Consumption is sustained in any of the following alternatives:
1. Borrowing to sustain deficit spending;
2. Utilizing retained earnings or past accumulated savings; and
3. Transforming real financial assets into cash.
Clearly, then, consumption must not be totally dependent
upon income or revenue.
 Reasons for saving
 The motivations for saving are numerous. Such as the enumerations herein
cited are not exhaustive or inclusive in themselves.
1. To finance the needs of the old age. The rationale for this is that no one can
continuously work to earn his living for the rest of his life.
2. To give insurance against the contingency of being unemployed or possible loss
of employment because of ill-health or accident.
3. To give protection for the family. The bread earner must take as insurance
policy which is another form of saving.
4. To enjoy fully retirement period in comfort and leisure.
5. To earn interest or additional income
6. To save because there is no other alternatives but to save. This may be
termed “force-saving”
 Worlds thriftiest savers
 1990 records of International Saving Bank Institute,
Japanese, the thriftiest savers in the world, average $45,118 per
population.
Switzerland, ranked second with $19,971.
Third, Denmark with $18,405 per head.
 Other top ten
France $17.650

West Germany $17,042

Austria $16,369

Norway $15,196

Belguim $15,111

Singapore $14,492

Netherlands $14,282
 Socio-Economic Factors in the
Saving Decision
The attempts to hypothesize the behavioural aspects of the saving
decision may be classified into "objective" and "subjective" factors.
• The objective factor are current hypothesis, life cycle hypothesis,
and the concept of "expected yields" ( O' Bannon, et al., 1972).
• The subjective (Personal) Factor may be due to tastes or preferences
brought about by differences in social, economic, political, religious,
cultural, educational up-bringing of individual savers,
idiosyncrasies, and the like.
 Current income hypothesis. According to Keynes, saving and
consumption are complementary to each other, i.e., they are both
alternative uses of income. The previous equation served to portray this
idea:
Income - Consumption = Saving
Consumption + Saving = Income
 The inter-relationships of income, consumption, and saving may be
reduced to one important question: "How do people decide how to
devide their income between consumption and saving?
 Permanent income hypothesis
This hypothesis contends that consumption does not
depend on current in come but on "permanent income".
Life cycle hypothesis
This particular hypothesis is founded on the
maximization of utility derived from the consumption of
goods and services.
 Expected yield
This term is described as "the interest rate implicit in the
relationship between the stream of future payments and the
market price of the asset that provides those payments"
(O'Bannon, et al., (1972).
 Factors That Affect Choices Among
Financial Instruments

Some of the most common financial instruments that are

usually available in the financial market:
Stocks, bonds, CBCI’s, commercial papers, promissory
notes, repurchase agreements, certificate of participants,
inter-bank call loans, certificates of assignment, bankers
acceptances.
 Financial instruments that will form
part of the asset holder’s portfolio

A. Credit Risk
Considering that a financial instrument is a claim to a stream of
future payments, there arises the uncertainty or risk that the
contractual payments may not be forthcoming as planned.
B. Liquidity
 This is synonymous to cash. If a financial instrument is said to be
liquid, it can be disposed of or converted into cash without much
appreciable loss in value and within the shortest possible time.
C. Speculation
The term speculation is likened to gambling, purchasing a financial
instrument at a lower price and selling the same time at a higher
price to realize a sizable gain or revenue in the process.
D. Inflation
 The term is always associated with rising prices.
E. Differential taxation
 Two types of financial instruments
Whose yield is tax-exempt
Whose yield is not tax-exempt
F. Other Considerations
In ending this chapter. May be mentioned that the demand for
particular types of financial instruments as forms in which wealth
may be accumulated may likewise be dependent upon their
marketability, negotiability, convertibility or liquidity, divisibility,
diversification.