20. Savings

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Consumption smoothing: spreading consumption over time to avoid large variations.

Life cycle saving: saving for specific events like marriage, childbirth, or retirement.

Saving for opportunities: starting a business, buying a home, or paying school fees.

Situations where saving might not be efficient

Low returns on savings or inability to save due to factors like high inflation.

High current income and uncertain future prospects.

Adequate social security benefits reducing the need to save.

Expectation of future income growth making saving less necessary.

The misconception that poverty prevents saving

Saving is about ensuring future consumption, not about current wealth.

Exception: Extreme poverty where current consumption is essential for survival.

High inflation eroding the value of cash savings.

Limited access to bank accounts among the poor.

High fixed costs of banking making it unprofitable to serve small depositors.

Risks of saving at home: inflation and theft.

ROSCAs improve self-control by providing a lump sum for a specific goal.

ROSCAs accelerate access to savings compared to individual saving.

Bidding ROSCAs allow members to bid for early access to funds, creating a form of interest.

Disadvantages of ROSCAs: inflexibility, short-term nature, and limited savings amounts.

Building a house incrementally as a savings method.

Unfinished houses in developing countries reflect this type of saving.

Disadvantages of this method: illiquidity and vulnerability to damage.

Jewelry as a savings asset: inflation-proof, divisible, and easily mortgaged.

Money guards vs. savings collectors: differences in accountability and security.

Self-help groups: flexible savings and lending within a group.

Savings collectors: professionals who charge fees for managing savings.

Microcredit as a savings instrument: borrowing for a purchase and repaying in installments.

Using the Euler equation to analyze savings optimality.

High borrowing rates suggest under-saving, implying rapid income growth which isn't observed.

Experiment with fruit vendors in India and the Philippines showing persistent borrowing despite high interest rates.

Conclusion: The money given to pay off debts was used to deal with unexpected events, leading to renewed borrowing.