Lesson 4: Savings, Investments, and Spendings

Savings

Portion of income not spent on current expenditures but set aside for future use.

Investment

Using savings to purchase assets with the expectation of generating returns over time.

Personal Savings

Money individuals set aside for future use, such as emergencies, retirement, or major purchases.

Business Savings

Funds retained by businesses instead of being distributed to owners or shareholders.

National Savings

Total savings of a country, including both public and private savings.

Economic Growth

Increase in a nation's output of goods and services, often fueled by savings and investment.

Life-Cycle Hypothesis

Theory stating individuals save and borrow to maintain stable consumption throughout life stages.

Permanent Income Hypothesis

People base consumption on expected long-term income rather than current income.

Ricardian Equivalence

Theory that government borrowing does not affect total demand, as individuals anticipate future taxation and adjust savings.

Present Bias

Tendency to prioritize short-term rewards over long-term benefits, leading to low savings rates.

Loss Aversion

People fear losing money more than they value potential gains, affecting investment decisions.

Mental Accounting

Categorizing money differently based on its source or purpose, influencing spending and saving behaviors.

Herd Behavior

Following the crowd when making investment decisions, leading to market bubbles.

Overconfidence Bias

Overestimating one's ability to predict market trends, leading to risky investments.

Compound Interest

Interest calculated on both the initial principal and accumulated interest from previous periods.

Wealth Building

Process of growing assets over time through savings, investments, and compounding.

Retirement Planning

Strategy for saving and investing to ensure financial security after working years.

Infrastructure Development

Government use of national savings to invest in roads, hospitals, and schools to boost economic efficiency.

Venture Capital

Funding for startups and small businesses, often sourced from private savings and institutional investments.

Capital Formation

The accumulation of capital assets (e.g., machinery, infrastructure) through investments funded by savings, driving productivity and economic growth.

Consumption Smoothing

The practice of maintaining stable consumption levels over time by saving during high-income periods and dissaving during low-income periods, as per the Life-Cycle Hypothesis.

Financial Security

The state of having sufficient savings or resources to cover emergencies and unexpected expenses, ensuring preparedness for life’s uncertainties.

Social Safety Nets

Government-provided programs (e.g., pensions, unemployment benefits, healthcare) that reduce individuals’ need to save extensively for emergencies or retirement.

Deficit Spending

Government expenditures that exceed revenue, often financed through borrowing, which may lead to anticipated future tax increases as per the Ricardian Equivalence Theorem.