Chapter 16

On the left are savers—those with excess funds. For a variety of reasons, savers choose not to spend all of their current income, so they have a surplus of funds. Users are the opposite of savers; their spending needs exceed their current income, so they have a deficit. They need to obtain additional funds to make up the difference. Savings are provided by some households, businesses, and the government; but other households, businesses, and the government are borrowers. Households may need money to buy automobiles or homes. Businesses may need money to purchase inventory or build new production facilities. Governments may need money to build highways and courthouses.

Generally, in the United States, households are net savers—meaning that as a whole they save more funds than they use—whereas businesses and governments are net users—meaning that they use more funds than they save. The fact that most of the net savings in the U.S. financial system are provided by households may be a bit of a surprise initially, because Americans do not have a reputation for being savers. Yet even though the savings rate of American households is low compared with those of other countries, American households still save hundreds of billions of dollars each year.

How much an individual saves is a function of many variables. One of the most important is the person's age. People often transition from net borrowers to net savers as they get older. When you graduate from college and begin a career, you likely have little in the way of savings. In fact, you may be deeply in debt. In the early years of your career, you may spend more than you make as you acquire major assets, such as a home. So in these early years your net worth—the difference between the value of what you own and what you currently owe—is very low and may even be negative. However, as your career progresses and your income rises, you will begin to build a financial nest egg to fund retirement and other needs. Your net worth is also likely to increase. It will continue to increase until you retire and begin drawing on your retirement savings.

Funds can be transferred between savers and users in two ways: directly and indirectly. A direct transfer means that the user raises the needed funds directly from savers. While direct transfers occur, the vast majority of funds flow through either financial markets or financial institutions. For example, assume a local school district needs to build a new high school. The district doesn't have enough cash on hand to pay for the school construction costs, so it sells bonds to investors (savers) in the financial market. The district uses the proceeds from the sale to pay for the new school and in return pays bond investors interest each year for the use of their money.