The relationship between education and income is strong. People invest in financial assets with the aim of "making money"-they hope to earn interest, dividends, profits, and/or capital gains in the future. There are several options for saving, including saving in a savings accounts or saving through the purchase of financial assets, which is called financial investment.
Notice that turning the flow of income into a stock of wealth requires saving money. Wealth is the accumulation-or stock-of saved money. Saving involves setting some of the flow of income aside to increase wealth. You may have heard people discuss the flow of income. For example, people often receive paychecks twice a month. Two similar terms must be differentiated here: Income is the payment people receive for providing resources in the marketplace. Thus, saving-to build wealth-is essential for a higher quality of life during retirement.įigure 3: A Model of Saving and Spending: The Life Cycle Theory of Consumption and Saving Within this pattern of planned borrowing and saving, the hump-shaped pattern of income (the curved line) allows for smooth consumption (the horizontal line) across the lifecycle. As shown in the model (Figure 3), people tend to borrow to purchase homes, cars, or an education when they are young, pay down debt and save a portion of their income during their peak working and earning years, and finally spend their saved money during retirement. Economists often use the life cycle theory of consumption and saving to explain this phenomenon. Income then tends to increase in middle age and decrease when people retire. In economic terms, this is called smoothing consumption. Because income tends to start low at younger ages, borrowing (taking on debt) allows people to have things now and pay for them over time. Saving to build wealth is an important part of financial planning. Wealth, also called net worth, is the total value of a person's assets, such as liquid assets (cash or something you can easily turn into cash), real estate, businesses, and cars, minus any liabilities (money owed debt). Saving is an essential component of building wealth. SOURCE: FRED ®, Federal Reserve Bank of St. NOTE: The horizontal line indicates the average saving rate over the period. 5 By comparison, German households saved 16.7 percent, on average, in 2015. personal saving rate was 5.7 percent, whereas it has historically averaged 8.4 percent (since 1959). personal saving rate has dropped substantially over the past 50 years (Figure 2). Americans don't save as much as those in other industrialized nations. The accumulation of money set aside for future spending and consumption is known as savings. Saving is not spending on current consumption or taxes and involves giving up some current consumption for future consumption. When people earn income, they use that income to do three things: pay taxes, buy goods and services (consume), and save. value was 0.386 in 1968, and the highest value was 0.482 in 2013. It gauges income inequality on a scale from 0 to 1: The higher the number, the higher the level of inequality. NOTE: The Gini coefficient (also known as the Gini ratio or index) is a common measure of income inequality within a nation. 4 While many factors contribute to income and wealth inequality, the role of education is a key piece of the puzzle.įigure 1: U.S. A 2015 Gallup poll found that 63 percent of Americans feel that the distribution of U.S. Income inequality has been increasing in the United States since the 1970s, peaking in 2013 3 (Figure 1). 2 However, gains in household income have not been evenly distributed across all income groups. Median household income in the United States in 2015 was $56,516, up from $49,276 in 2010. "By some estimates, income and wealth are near their highest levels in the past hundred years, much higher than the average during that time span and probably higher than for much of American history before then."Īmericans have among the highest living standards in the world and have enjoyed rising living standards for decades.
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