People earn money to fulfil both their present and future needs. If they spend their whole income today then nothing will remain for future and then they won’t be able to satisfy their wants tomorrow. But if there is saving, then it can be used in future. So saving is the amount of income which is carried forward to future after meeting the current expenditure on goods and services and other things.

This means that saving is the surplus of income over consumption.

Saving = Income – Consumption

How Saving is Useful

Saving is useful in the following ways:

1. For example, Mr. X saved Rs.5000 last year. This implies that, in the beginning of the current year he starts with an extra Rs. 5000. So his income will increase by at least Rs.5000 this year, provided his income and expenditure do not change. This means that, saving increases the future income of the person.

2. Saving can act as a kind of security for future. Suppose Mr.X falls ill in the beginning of this year. So he could not go to work for a week. There is no need to worry. He can always use his last year’s saving to carry on for some time till he recovers from illness and start going to work and earn again.

Where Savings are Kept

Coins and currency notes of small denominations are put in a small saving box. After some time, when the box is opened, there is good amount of money existing in the box which becomes very useful to buy some new thing. This saving box is an informal way of saving. It cannot be used for saving a big amount. It is also not safe to keep money in this manner because of the threat of theft.

The money kept in the box also remains idle or unused till the time box is opened. Since it is a private affair, nobody else, can use it. Finally, no reward is given in return for saving in this manner.

Money needs a secured place to be kept. It is also needed for use. It should not be left idle. The society has provided institutions where you can keep savings. They are post offices and commercial banks.

1. Post Office Savings Bank

Any individual can keep his or her unspent money in post office saving bank. There is a post office in almost every locality. So it is close to anybody’s reach. Any citizen of the country can open an account in his or her name in any post office by depositing a minimum Rs.50 only. A person can keep money for any period of time and he or she is allowed to withdraw any amount from the account at any time. 

A pass book is provided by the post office to keep record of the transactions made by the holder of the account holder. The post office also allows a nominal rate of interest on saving bank account.

2. Savings Account in Commercial Bank

Commercial banks accept deposits from the public. An individual who wants to save money can open a saving account in the bank. The minimum amount necessary to open an account and minimum balance to be left after withdrawal of money are prescribed by the concerned bank where the person saves money.

Like the post office, a bank also provides a pass book to the depositor which shows details of deposits and withdrawals and the balance available. A commercial bank allows a nominal rate of interest on the saving bank account.

Uses of Saving

Savings can be used for the purposes of lending and borrowing as well as development of the economy.

1. Lending and Borrowing

A person, who saves, can become a lender, because he has surplus money available with him presently. Many people in the society want to consume more than what their present income could allow for various reasons. These people can borrow money at the time of need and repay it in future.

2. Development of the Economy

When many individuals save money in post offices and banks, a very large amount of money becomes available for use by the society. Small drops taken together make an ocean. Similarly, an individual may be saving very less depending on how much he is earning and how much he is spending. But when many individuals start saving, they are added together to make a large amount.

For a society, a large amount of money is required to build roads, office buildings, railway stations, street lights, amusement parks, schools. Because of this the whole country is benefited in future. So saving by an individual eventually becomes useful in the process of development of the economy.

Interest as Return on Saving

One can use saving to earn money which is called return on saving. This return is termed as Interest. A person who has saved money can become a lender by providing that money to a borrower who wants to borrow now. For the use of this saving, the lender can charge some money from the borrower which is called interest earned by the lender and paid by the borrower.

Normally the borrower pays back the lender’s money (saving) along with the interest money on a specified future date. When a borrower takes money from a lender, the lender provides loan to the borrower. The loan amount has to be returned by the borrower to the lender in future along with interest.

Example: Let Mr. X has a saving of Rs.1000. Mr. Z wanted to borrow that money. So X became a lender and Z, a borrower. It was decided that, Z would have to repay the loan amount of Rs.1000 to X after a year. It was also decided that Z will have to pay Rs.120 as interest. Accordingly, after a year, Z paid a total sum of Rs.1120 (1000+120) to X. Hence, by lending her saving, X earned Rs.120 as interest on saving besides getting back the same amount.

Rate of interest

Rate of interest is defined as the earning by the lender by payment by the borrower for the use of every 100 Rupees given by the lender to the borrower for a period of one year.

Since people keep their savings in the post offices and banks, they receive interest. When you receive interest on savings in a post office or bank, money grows. Hence when money is saved today, it grows to a higher amount tomorrow.