Marginal Propensity to Save (MPS) is a portion of an increased income that you choose to save rather than spend. You can arrive at this by dividing the change in saving by a change in income.
When you have slight changes in income, you can save. This can make you have a high marginal propensity to save.
Practical Demonstration of marginal propensity to save
Assuming your employer usually pays you a salary of 3000 USD and this month he increased it by 900 USD. If you choose to spend 550 USD of this 900 USD on school fees, you will save 350 USD.
You can calculate your MPS this month by dividing 350 by 900. This gives you a Marginal propensity to save of 0.388.
What you have spent is known as marginal propensity to consume (MPC). Therefore, it is calculated by dividing the increased amount spent by the increased income. For example, the MPC of 550 USD is divided by 900 USD, which is 0.611.
Factors that determine the marginal propensity to save
Increase in income
It’s an assumption that rich folks tend to have a higher marginal propensity to save than the poor. However, you can change what you save and consume based on your increased income level.
If you have an increase in your income, most of your needs will be easily met. You will reach a point where you don’t have to spend more because you must have bought almost everything. This will create room for you to build a high MPS.
In addition to this, your life-cycle as a consumer also influences your MPS. For instance, if you are a student, you have a zero MPS and can take loans. Once employed, you will pay debts, spend on goods and services, and later begin to save.
Sometimes, you may not buy the idea of life-cycle theory. For this reason, you may spend everything you have earned and have a zero MPS. This behavior will make you have an MPC of 1, and this will mean that you are a risk-taker.
If you are not a risk-taker, you can develop a habit of compromising your needs at the expense of saving. This could be because you foresee a situation of unemployment or thinking of another project to invest in. Because of this, you will end up having a very high Marginal Propensity to Save if not 1.
Apart from these, if you have a habit of hesitating to spend an increased income, you can make an unintentional saving. This happens because you are not decided on what to spend your money on and therefore have a high MPS.
As you age, your MPS declines because you use your household financial reserve. In as much as you may save during old age, your income will mostly be spent on grandchildren and children. This makes your MPS to be lower during your old age in comparison to when you are of middle age.
You will notice that MPS differs from one individual to another because your income is different from other people. A high marginal propensity to save can make you invest more and grow economically.
Because saving and consumption influence each other, you will notice that MPS is a critical factor in household expenditure. The amount you save is sometimes called economic leakage, and it demonstrates that you can satisfy your financial needs. Generally, maintaining a consistent MPS is only possible when you avoid borrowing and start spending less. You can also scale up your projects to increase your income.