Academic journal article The Journal of Consumer Affairs

Household Savings Motives

Academic journal article The Journal of Consumer Affairs

Household Savings Motives

Article excerpt

This study proposed a hierarchy of savings motives and identified factors that influence the movement to higher levels of the hierarchy. Continuation ratio analysis utilizing data from the 2001 Survey of Consumer Finances shows the likelihood of advancing to higher levels of savings motives from the current level. Age, family size, and length of the planning horizon are important predictors for advancing from lower levels to higher levels in the proposed hierarchy. Implications are offered for public policy regarding education and programs.


The savings rate of American households has declined sharply during the past decade (Marquis 2002). Researchers have empirical evidence on who saves but little is known about the motives for saving (Bucks, Kennickell, and Moore 2006). All economic theories of saving are based on some form of the discounted utility model, which postulates that what one receives in the future is less valued now than it will be later (Fisher 1930). Keynes (1936) assumed that savings motives change very slowly and that the influence of savings motives on the propensity to consume is stable over long periods of time. He identified two dimensions to savings decisions: the propensity to consume and the liquidity preference, e.g., how much one prefers to retain in cash. Keynes believed that people would increase consumption as income increases but not by as much as the increase in income.

The life-cycle hypothesis of savings (Ando and Modigliani 1963) and permanent income theory (Friedman 1957), which assumed that people are concerned about long-term consumption, challenged Keynes' (1936) focus on current income. The theories explain saving and consumption in terms of future expected income. The permanent income hypothesis (Friedman 1957) assumes that households will respond to changes in permanent income but not to changes in transitory income.

In contrast to Keynes' idea that savings motives change very slowly, psychological theories of saving assume that tastes are not fixed. Katona (1951, 1975) suggested that individuals are influenced by their ability to save and their willingness to save. Katona (1951, 1975) believed that the willingness to save is influenced by expectations and sentiment.

Duesenberry (1949) emphasized the importance of peers on the likelihood of saving. Furnham (1985) and Katona (1975) suggested that past savings experiences influence the likelihood of saving.

Thaler and Shefrin (1981) developed the behavioral life-cycle hypothesis, which allows for the possibility of both a short-term and a long-term focus. They believed that individuals have instincts to be both a planner who is concerned with lifetime utility and a doer who is focused on the present. Thaler and Shefrin also suggested that individuals practice mental accounting meaning they have different propensities to save in different categories of accounts. For example, they may think differently about funds in a retirement account than those in a cash reserve for emergencies.

Xiao and Noring (1994) pointed out that economic models consider only one motive at a time when modeling behavior. To expand upon this limitation, Xiao and Noring attempted to study several motives at once by arranging the motives in a hierarchy based on Maslow's hierarchy of needs. Then they utilized chi-square tests to examine the relationship of demographic characteristics with the savings needs arranged as a hierarchy comparable to the hierarchy of needs. In another study, Xiao and Anderson (1997) hypothesized that increased financial resources would enable families to move from lower to higher levels of needs. They concluded that "as family financial resources increase, families tend to pursue a higher level of financial needs" (Xiao and Anderson 1997, 352). However, they were not able to illustrate progress from one level to another.

Therefore, the purpose of this study was to examine the likelihood of movement from one level to higher levels and also to learn which factors affect the likelihood of movement. …

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