Marginal Propensity to Save

Marginal Propensity to Save April 19, 2011

Would you classify yourself as a saver or spender?

Think about this:  If you get a bonus at work or finish the month with an extra $100 of discretionary money, what would you do with it?  Would you save it or treat yourself to something extra?

Economists have a term for this – it’s the Marginal Propensity to Save (MPS).   It’s really a way to see what a household does with its extra income.  For example, if MPS is 0.30, then 30% of any extra (or discretionary) income is put towards savings.  For every extra dollar that comes in, your family would save $0.30 and spend the rest.

Calculating Your MPS

If you want to calculate your MPS, use this formula.  (Remember, the MPS takes into consideration how you save extra, or discretionary income)

MPS = New Savings – Previous Savings

New Income – Previous Income

=   $300   – $200

$3,300 – $3,000

= 0.33

In this example, the family earned an extra $300 for the month.  They had been saving $200 each month, but were able to increase that to $300.  This family’s propensity to save is 0.33.  They save $0.33 on every extra dollar they earn.

What’s your MPS goal?

I’ll be honest, I hadn’t set a MPS goal until thinking about this principle in detail, but I can see the value in setting a goal based on solid figures like the MPS calculation.  I would love to save 75% or more of each extra dollar we bring in above our income.

Learn about Marginal Propensity to Consume…

The MPS is only one half of the story.  You need to understand marginal propensity to consume as well.

Have you ever heard of the Marginal Propensity to Save calculation?  Feel free to share your goal in the comments or even share what you calculated your MPS to be.

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