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    Understanding Marginal Propensity To Save

    Any amount you want to save rather than spend from an increased income is marginal propensity to save (MPS). It is gotten by dividing the change in saving by the change in income. 

     

    A slight change in income can yield a high marginal propensity to save, for instance: If your usual salary is $4000 and it is increased by $700. If you decide to spend $450 of this $700, which is called your marginal propensity to consume (MPC), it’s gotten by dividing the $450 by $700, which is 0.6. While the $250 you saved is the marginal propensity to save gotten by dividing the $250 by $700, which is 0.3.

     

    Factors that determine marginal propensity to save are:

    Life cycle theory

    Consumer lifestyle also influences MPS. People who spend everything they earn without any savings have an MPC of one, and they are called risk-takers because they don’t believe in life cycle theory. While people who save by compromising their needs have a high MPS, if not one.

     

    Spending habits

    This happens when an increased income has not been spent, probably because you don’t know what to spend it on yet; you automatically have a high MPS.

     

    Age

    As you age and use up the financial reserve you saved during your middle age, your MPS reduces more than it was in your middle age. MPS varies with each individual income, and a high MPS leads to economic growth.

     

    Increase in income

    This means having enough to save after spending.

    A good MPS can be maintained by spending less, increasing your income, and avoid borrowing.

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