Understanding Savings: Reasons and Strategies Explained

People save for consumption smoothing, life cycle events, and opportunities; however, high income growth or extreme poverty can make saving inefficient.

### Understanding the Reasons and Mechanisms Behind Saving
* 💭 People save for various reasons, primarily for **consumption smoothing**, which helps to **maintain a stable living standard over time**, avoiding drastic fluctuations in consumption.
* 👶 Another significant reason for saving is related to life cycle events, such as retirement, marriage, or childbirth, with **retirement being the most predictable and important event** for many in the U.S.
* 💼 Additionally, individuals save to take advantage of opportunities, like **starting a business or purchasing a home**, which require **significant upfront costs**.
* 📉 Conversely, there are situations where saving may not be efficient, such as when individuals have **high current utility needs** or when future income is **uncertain**, leading them to prioritize **immediate consumption** over saving.
* 💰 The discussion also highlights that being poor does not inherently prevent saving; rather, the **expectation of future income and opportunities** plays a crucial role in determining saving behavior.
* 🏦 A common saving mechanism among the poor is the **ROSCAs (Rotating Savings and Credit Associations)**, which allows members to **pool resources and access larger sums of money more quickly** than traditional saving methods.
* 🏠 While ROSCAs offer advantages like **immediate access to funds** and help with **self-control**, they also have limitations such as **inflexibility** and typically **short-term horizons**, making them unsuitable for **long-term savings goals**.
* 🔨 In developing countries, individuals often invest in physical assets, like building homes incrementally, as a **practical saving strategy**, reflecting **limited access to formal savings products and credit markets**.

### Understanding Savings and Investment Behavior in Low-Income Communities
* 🏠 Illiquid assets, such as real estate, can be detrimental for those in need of quick cash, as they **cannot be easily sold for immediate funds**.
* 💍 In contrast, jewelry like gold is a common asset in developing countries, providing both a **form of savings** and a **hedge against inflation**, with gold currently valued at **$1,500**.
* 💰 Gold's liquidity makes it a favorable asset; it can be **easily mortgaged or sold for cash**, unlike more complex assets such as homes that require **inspections to determine value**.
* 📊 Financial savings, which include assets in banks and various forms of paper assets, provide alternative ways to **secure funds**, with money guards and savings collectors acting as intermediaries for those **without bank accounts**.
* 🤝 Self-help groups and ROSCAs (Rotating Savings and Credit Associations) offer community-based savings solutions, though they vary in **flexibility** and require varying levels of **accounting skills** to manage effectively.
* 📈 The discussion extends to microcredit as a savings instrument, where individuals can borrow to buy necessary items while paying back with interest, effectively **forcing them to save**.
* 📉 However, evidence suggests that low-income individuals often **under-save**, with a significant portion **borrowing at high-interest rates**, indicating potential inefficiencies in their savings strategies.
* 🔄 Experimental results show that even when debts are paid off, individuals frequently return to borrowing due to **unexpected financial shocks**, highlighting the **precarious nature of financial stability** in low-income communities.

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.