What is "personal savings"?

Factual Questions
1

The BEA has this definition:

The 1st sentence is OK: Personal saving is personal income less the sum of personal outlays and personal current taxes. Although I’d quibble over and taxes, since presumably taxes would be included under “outlays”, otherwise it’s pretty straightforward: Savings is income minus spending (“outlays”). And it makes it clear that we’re talking about a flow rather than a stock: not the total amount of savings, but the amount accumulated over a particular period of time.

The second sentence is more problematic. It is the current saving of individuals…

Well, it’s not really the current saving of individuals. It’s the the amount saved over some particular period of time - or more specifically, between two particular dates. (Say, 1941 and 1942, for example.)

Using the word “current” makes it sound like they’re talking about a stock, rather than a flow. If you asked somebody what her current savings are, she’d probably give you a number that represented a stock of money (her savings account, for example) not the difference between spending and income between two dates.

The rest of the sentence I’m going to pretty much ignore (“private noninsured welfare funds” – what the heck is that?) except to say that it seems to explicitly exclude two sectors: corporations, and the government.

The last sentence is the worst: Personal saving may also be viewed as the net acquisition of financial assets (such as cash and deposits, securities, and the change in life insurance and pension fund reserves), plus the net investment in produced assets (such as residential housing, less depreciation), less the net increase in financial liabilities (such as mortgage debt, consumer credit, and security credit), less net capital transfers received.

“Net acquisition of financial assets” makes it sound as if changes in asset values are considered part of savings. I’d don’t think they are, and it certainly wouldn’t make sense if they were, but at the very least it’s confusing. I’m not sure what “net investment in produced assets” means exactly, but the example sounds as if spending on your home is “saving”, rather than spending.

I understand the concept (you buy granite countertops: the value of your home goes up, therefore you’re “saving”). But it seems like once you start down that road, things get confusing very fast. What if granite goes out of style? Is the amount of savings the (theoretical) increase in the value of the home, or the cost of installing the counters? What if you install them yourself?

What about other “produced assets”, like your car? Or any other thing that you buy? Does “produced assets” mean some other than things that exist (have been produced) and have market value?

Anyway, thanks in advance, for clarifying my confusion.

2

what’s the BEA?

3

Sorry. Bureau of Economic Analysis. I meant to provide a link for the quotes. It’s here, page 13.

Basically, “savings rate” could mean either the difference between income and spending, or it could mean changes in net worth.

If it means changes in net worth, it ought to include changes in asset valuations - like the stock market, for example, or bitcoins, or gold. But I don’t think it does.

On the other hand, if it’s the difference between income and outlays, then the savings rate for the economy as a whole must be 0, since every transaction is income to someone, and spending to someone else.

4

[QUOTE=LinusK]

The second sentence is more problematic. It is the current saving of individuals…

[/QUOTE]

“Current” is appropriate. In the financial sense, current means “recent” or “short-term”. The BEA is reporting on recent saving activity; the most recent month, quarter, year, etc…, depending on what data you are looking at. The BEA is not reporting the current accumulated assets (this is reported by the Federal Reserve).

[QUOTE=LinusK]

“Net acquisition of financial assets” makes it sound as if changes in asset values are considered part of savings. I’d don’t think they are, and it certainly wouldn’t make sense if they were, but at the very least it’s confusing. I’m not sure what “net investment in produced assets” means exactly, but the example sounds as if spending on your home is “saving”, rather than spending.

[/QUOTE]

The BEA calculates Personal Saving using two different methods, hence the two definitions. The National Income and Product Accounts Saving Rate is calculated as Personal Income less Personal Outlays and Personal Taxes. At the risk of oversimplifying, the Flow Of Funds Saving Rate is calculated, roughly, as the changes in personal Net Worth. When determining the Flow Of Funds Saving Rate, investment in financial assets and tangible assets are considered saving, but the purchase of durable goods is not considered saving. Money spent on durable goods is subtracted from the saving totals. The two methods result in the reporting of two different personal saving numbers.

5

Is this to produce a statistical picture, ie. how much savings in the country? Then I take “current” to mean “right now”. Who cares if you saved $20,000 and then blew it two years ago on a cruise around the world? The question is, what are your quasi-liquid assets right now?

“financial assets” I take to mean things like stocks and bonds. In a broader sense the definition seems to includes insurance policies and pension plans etc. that have a value in the future thanks to money you’ve been putting in.

“net investement in produced assets” I assume means you personal disposable assets - typically here they seem to be steering you toward “what’s your house worth, net?”. I suppose if you have an expensive or classic car or art or a coin collection, etc. - worth real money - they would want to count that; the wording sems designed to exclude business investments - if you own income-producing properties like rental houses, that’s more of a business investment than personal savings (because the value includes the income it generates, not just its net present value).

6

The accounting definition of current is an asset available to be withdrawn/converted to cash, or a liability to be paid, in less than 12 months. I’d be surprised if this definition was using it to mean anything else.

7

I am always astonished at how complicated any tax-related discussion can make a simple financial term. If you leave out the gamesmanship of trying to categorize money by how it might be taxed (directly or indirectly), you an answer the OP’s question in one short sentence:

Personal savings is the wealth an individual has in liquid assets that has no short-term need to be spent.

8

That’s a pleasantly short sentence. Unfortunately it’s not correct.

You’re trying to define something like the stock of our net worth or wealth, but in this context, we’re talking about personal saving as the change in net worth over a particular time period that results from people spending less than their disposable income. This is distinct from the change in net worth that results from capital gains, which is deliberately excluded. Personal saving is a flow, not a stock as you tried to describe it.

But it’s true that it’s is a pretty simple concept when all the qualifications and jargon are stripped away: it’s when people – distinct from the business or government sectors – spend less than their disposable income. That’s it. That’s pretty much the whole idea. If I earned 100k disposable income over a year, and I spent 50k of that, then my contribution to personal saving is 50k. This is a flow. It means that my net worth changed by 50k for this particular reason (as opposed to changing for other reasons), but it says nothing about what my wealth is. I could have millions of cash stuffed away, but my own slice of personal saving is still only 50k over the given time period.

Personal saving = personal disposable income - outlays. That’s the definition.

The real trick to it is aggregating the sectors. How are “people” defined compared to the other sectors of the economy? When we add the sectors together, it’s necessary that a lot of things cancel out and balance out, so national saving looks quite different from saving within the personal sector.

9

The purpose is to estimate personal incomes, and how people are spending those incomes. Money not spent towards personal taxes or personal outlays are considered savings, under the NIPA method. The BEA report is not designed to answer questions such as “How much money do people have in the bank right now? How much money could people tap if they had to?”. These types of questions are net worth/balance sheet questions, and are handled by the Federal Reserve’s report “Financial Accounts of the United States”. “Current Personal Saving”, in this context, means “Of the money you made this past month, how much of it did you spend on taxes and personal outlays, and how much of it did you not spend at all?” (the BEA publishes the Personal Income and Outlays report monthly).

10

I don’t want to get too bogged down in semantics, but ordinarily “current” means something like “now”. If savings is a percentage that’s calculated between any two particular dates (like 1941 and 1942), then “current” seems like the wrong word to use. Especially if it leads to confusion about whether savings is a stock or a flow.

I think you’re wrong about Flow of Funds. That’s produced by the Fed, not the BEA. I’m interested in the Flow of Funds too, but I think it’s worthy of a different thread. What I’m trying to ask about is the savings rate, which is currently reported by the popular press as somewhere around 4%, and is, to my understanding, a number produced by the BEA.

11

Ah. Those darn verb tenses again. :slight_smile:

Make it:

*Personal savings is the liquid assets an individual accumulates that have no short-term need to be spent.

*This can refer to either a static or changing total, or any acquired addition, or both.

12

I don’t think that’s what the BEA. Is calculating, or what the popular press is reporting, when they say the savings rate is X%.

On a different note, if you tried to calculate - or count - “savings” - using your definition, you’re not really measuring anything. Or at least, not anything other than people’s subjective attitudes about the future. Somebody might be underwater financially, because of student loans or credit card debt, or whatever, but might consider himself to have “savings” because he’s put a certain amount of money in a certain place - say, a shoebox, instead of a checking account (or paying off a credit card). I don’t know that it makes any sense to try to measure savings that way, and I don’t think that’s what the BEA is doing, or what news sites are talking about when they report the “savings rate”.

13

Right, Flow of Funds data comes from the Fed. But the BEA posts both saving rates. See: https://www.bea.gov/national/nipaweb/Nipa-Frb.asp?Freq=Qtr (warning, the page uses Java) . The secondary BEA definition comes directly from the Flow of Funds calculation. Typically, the popular press is likely to be reporting the personal saving rate using the first definition, that is:

CurrentDisposableIncome = CurrentIncome - CurrentTaxes
CurrentSaving = CurrentDisposableIncome - CurrentOutlays
CurrentSavingRate = CurrentSaving / CurrentDisposableIncome

14

All of which shows the slippery nature of financial terminology and how so much of seems to communicate precision when it’s more likely to foster confusion. Only if both parties hold exactly the same understanding and interpretation of factor or datum does it communicate sensible info.

15

When you say it’s necessary for things to cancel and balance out, you mean they have to cancel out to zero, right?

Also, without arguing with the definition (since definitions are whatever they are…by definition) couldn’t you simplify (if you wanted to):

“Personal saving = personal disposable income - outlays”

to

(Personal) saving = (personal) income - (personal) spending?*

*Assuming, for the moment, you defined “spending” to include spending on taxes.

16

Sorry, that was a reasonable interpretation of my post, but that’s still not right. See below.

I don’t know what you mean “cancel out to zero”.

When you count everything together, expenditure must equal income: every dollar of income is someone else’s dollar of outgo. But national saving isn’t defined as income minus expenditure, so it doesn’t equal zero. And personal saving is also not defined as personal income minus personal expenditure. It’s disposable income minus outlays, and those words are not the same thing and don’t mean the same thing.

Those aren’t the words that are used.

Jargon is frustrating but it develops for a reason. A new idea pops up, and the most obvious label is attached to that idea. Then a second idea pops up, and another new label is required. Maybe the first label would be better attached to the second idea, and vice versa. Maybe funky new words should be developed instead of re-appropriating commonly used words and perverting them to technical uses.

But it’s too late. The jargon is what it is. So we have this word “outlays”. It excludes taxes. Okay, you don’t want to argue semantics and that’s easily compensated for. But unfortunately, that’s not good enough because outlays also excludes investment spending, and that’s something we can’t possibly ignore. Sole proprietors belong to the personal sector for these national accounts, not the business (private enterprise) sector, so if a sole proprietor machinist buys a new lathe for their shop, that’s clearly an expenditure but it’s not an outlay. Outlays are 1) personal consumption, 2) personal interest payments, and 3) personal transfer payments (either to the government or internationally).

The machinist earns 100k after taxes. They spend 50k on personal consumption, then buy 50k worth of equipment. What’s their contribution to personal saving? Maybe they have zero money left, but personal saving is 50k for this time period. (And the personal saving rate is 50% in this case.)

These are terms of art. We can’t stumble through these thickets of strange meanings and start cutting away the annoying semantic vegetation, replacing all the weird words with others that are more comfortable, because eventually we’re going to erase a distinction that exists for a reason. The word “outlay” is used for a reason. It makes a subtle distinction that people who are trained to work with these figures understand. It might not be the best word if we lived in the best of all possible worlds. If we had to design our system from scratch, we might choose an entirely different vocabulary. But we’re here now, and tradition has an inertia of its own. The words were assigned to the accounts, and we keep using them consistently over the years to avoid any unnecessary confusion.

I said the basic idea was pretty simple. And it is. But if you keep digging into it, you quickly sail past the basic idea and have to start fitting the pieces together into a coherent whole. In order to do that, we have to realize that investment is saving, not an outlay. And that is, in fact, the reason that I started with national saving in your other thread on this topic and tried to work my way down (although I never finished the explanation). In this thread, you’re starting with a jargony word whose definition is filled with even more jargon. You’re starting small and you’re trying to work your way back up, but it’s not nearly as easy to do because when you’re zoomed so far in, everything is pixilated and it’s difficult to perceive the reasons for these subtle distinctions in terminology. But the distinctions exist for a reason.

It’s not spending. It’s not expenditure. It’s “outlays”. This isn’t easy and there is no way to make it easy. The only way to approach it is slowly, one idea at a time.

17

Well, now I’m more confused. So personal savings is the difference between income and spending at the personal level, plus whatever economists consider to be “investments” by sole proprietors… which are not considered to be businesses… even though they are.

But spending on things like stocks, bonds, gold, and real estate are still considered “spending”’ right? Not investments?

18

“Right” in this case depends on whether you are addressing the IRS, an econ professor or reality.

The IRS wants to know if it’s taxable and under what schedule.

The professor wants to fit it into standard economic models, which you can dismiss under “jargon” or not, as you like. I dismiss them as largely theoretical nonsense.

Defining “personal savings” should not take more than a dozen or two words… in reality.

Now, if this is all about interpreting that BEA paragraph to determine compliance with some tax/lending/theoretical framework… fine. But the subject line asks a simple question, and once the IRS agent and econ prof step out for a smoke, there’s a simple answer.

19

It might be worth noting that the BEA is defining personal “saving” without an ‘s’ at the end. That’s a verb: how much saving are people doing per year (or whatever period)
It’s very different from the noun “savings” with an ‘s’. That’s a total accumulation.

Not as I understand Hellestal

I think the idea is that investments shouldn’t count as outlays, because you haven’t really spent them – you could always sell the investment and get your money back. Unlike, say, paying for food or entertainment-- that money is gone forever.

And doesn’t that make sense? If you earn $50,000, spend $45,000 on taxes, rent, food, etc. and put $5,000 into a mutual fund, most people would agree that you saved $5,000.

The example of a new lathe is tricky, because it depreciates and the depreciation is indeed an outlay, but that’s probably best talked about at a different time.

20

No, personal saving is not the difference between income and spending plus investments. Personal saving is the difference between disposable income and outlays. Income is not a synonym for disposable income. Spending is not a synonym for outlays, unless you choose to define spending in precisely the same manner as personal outlay is defined. You’re trying to substitute common words, or the common, everyday definitions of words, for words that are being used in a specific economic context with their specific economic definitions.

Spending personal cash to purchase a stock is an expediture, yes. You lose personal cash and gain personal ownership of the shares of stock. Spending personal cash to purchase a stock is not an outlay, because the BEA chooses to define outlay in a specific manner. You cannot equate “spending” with “outlay”. The word “spending” appears only once in this month’s Personal Incomes and Outlays News Release, and it is used as synonym for Personal Consumption Expenditures, not Outlays.

Personal Income, Personal Outlays, and Personal Saving are metrics used to measure activity by individuals, and are not applied to businesses by definition. As the BEA mentions in its definition, persons, business proprietors, and business partnerships are all lumped into the category of individuals for BEA purposes. No, this does not conform to the common, everyday, definition of the word “individual”. The BEA is specifically choosing to define the word “individual” in a certain manner for its purposes.

So again, when the BEA is reporting a Personal Saving Rate in its monthly report, it is:

  1. Estimating Personal Income for individuals over the past month
  2. Estimating Personal Taxes paid by individuals over the past month, and subtracting that from Personal Income to determine Personal Disposable Income
  3. Estimating Personal Outlays (not all Personal Expenditures, Personal Outlays only!) by individuals over the past month, and subtracting Outlays from Personal Disposable Income to determine Personal Saving.
  4. Dividing Personal Saving by Personal Disposable Income to determine the Personal Saving Rate.

[QUOTE=Amateur Barbarian]

Defining “personal savings” should not take more than a dozen or two words… in reality.
[/QUOTE]

Yes, defining “personal savings” in common, everyday-language fashion is not that complicated. But it seems to me the OP is not asking about the common, everyday definition of personal saving; he is asking about the BEA-specific definition of personal saving, which is a different beast.