By
Shane
|
News
What is a Savings
Rate?
A Savings rate is defined as the value stated as a percentage or ratio, that an individual can deduct from his or her net income for the purpose of saving it for retirement. That particular amount of money is usually put invested in very low-risk investments such as money market funds or for a retirement account.
What Are The Factors That May Affect Savings Rate?
Savings rates tend to reduce as populations age. In this
case, they chose to spend their money rather than saving them. Interest rate
policies can also affect the decision of the people. Some other factors
include:
Consumer confidence can affect the savings rate. If the
households could feel negativity towards the economic opportunities,
consequently, they will prefer to save more and focus on paying off their
debts.
When a credit crisis happens, credit can’t be obtained
easily. Therefore, financing will decrease, and people will choose to focus on
saving. On the contrary, a greater chance of credit, and an increase in work
productivity can cause a lesser chance of saving.
Another factor that
can lower savings rates is the increase in wealth. People usually save to buy
properties such as their own home. The housing market has a big influence on
saving in Australia. Increasing house prices promotes mortgage equity
withdrawal, and at the same time, an increase in spending. Conversely, a
decrease in house prices has the opposite effect.
Savings rates can be affected by wage growth. Negative net
income growth will result in a decline in the savings rate. As a result, people
will spend through financing and from their savings.
- The Effect Of Savings Rate Cuts
Economic experts believe that a higher interest rate can
lead to lower overall expenditures and higher savings. It is because the substitution effect
outweighs the income effect.
Substitution Effect
Lower interest rates substitute saving for spending. It
implies that a cut in the interest rate also means a drop in income as these
people receive lower income payments. It will attract consumers to hold their
cash rather than spending it. For instance, if a pensioner relies on interest
payments from saving, he may decide to save more with the intention of
maintaining his target income from his savings.
Income Effect
The amount of spending is based on income. Lower interest
rates make saving less attractive. However, some consumers may react to lower
interest rates by saving more so as to maintain their standard of living. On
the contrary, some consumers may spend more if their income increases and they
may spend less if their income drops.
Based on the latest news from RateCity, ANZ and NAB have reduced their savings rate again. The cutting of the savings rate intends to make financing at a lower cost for consumers and businesses. It also promotes spending and strengthening the economy.
