Precautionary savingss

Precautionary savings is a term that is used to denote all those savings that are done to secure the future and to remain in sound financial condition even if the earning of the individual becomes low in future than what it is at present. According to the theory of precautionary savings, the rate of savings of the households becomes high whenever the amount of uncertainty regarding the future rises. There is one condition that is related to this rise in the savings and that is the positive functioning of third derivative. Generally, it has been seen that role of precautionary savings becomes limited if the effects of general equilibrium are considered.

Again, the individuals are mainly focused on avoiding the welfare losses by using the precautionary savings. In this context, the precautionary savings can be termed as a buffer that is created by the individuals to keep on their consumption path to a certain level. There are a number of things that can be labeled as precautionary savings because these secure the individuals financially in the future. These are the insurance plans, medical policies, retirement plans and many more.

The retirement plans provide financial assistance to the individual and helps the individual to maintain a certain level of financial freedom in the post-retirement period. Again, the retirement planning enables the person to carry out certain financial responsibilities in that period. On the other hand, the medical plans provide the necessary medical expenses to the individual in the post-retirement period. Insurance plans are of many types and almost every kind of financial as well as personal risk can be covered through these plans.

A major part of total savings consists of the precautionary savings and so these savings play an important role in maintaining a good rate of savings. There are certain studies that show that more than 50 percent of the total wealth of United States of America is created by the precautionary savings.