Introduction to Finance

voluntary savings 
savings held or 
set aside by choice for future use
contractual savings 
savings 
accumulated on a regular schedule 
by prior agreement
personal savings rate 
personal 
savings divided by disposable 
personal income
TA B L E 7 . 3
Historical Personal Savings Rates in the United States
Year
Personal Savings 
Rates (%)
Year
Personal Savings 
Rates (%)
1960
10.0%
1990
7.8%
1965
11.4
1995
6.4
1970
12.6
2000
4.2
1975
13.0
2005
2.6
1980
10.6
2010
5.6
1985
8.6
Source: U.S. Department of Commerce, Bureau of Economic Analysis, http://www.bea.gov.

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C H A PT E R 7 Savings and Investment Process
Great Recession by saving more of their disposable personal income. However, by 2015 indi-
viduals were a little less conservative in their spending outlays as moderate economic growth 
continued and the unemployment rate fell.
Individuals as a unit spent most of their disposable personal income and also borrowed 
heavily to fi nance purchases of homes and other durable goods during the middle of the 2000s 
decade. The federal government encouraged home ownership, and lenders contributed to the 
problem by off ering subprime mortgage loans to home borrowers. We will discuss mortgage 
lending and changes in individual borrowing habits later in the chapter.
A number of media are available in which to maintain savings, ranging in liquidity 
from cash balances to stocks and bonds. Three factors usually infl uence a person’s choice of 
medium: liquidity, degree of safety, and return. Various types of fi nancial instruments and 
securities that individuals may hold are discussed later in this chapter.
Corporate Savings
Corporations generate revenues and incur operating expenses. When revenues exceed operat-
ing expenses, profi ts before taxes are generated. Corporations then pay taxes on their before-
tax profi ts, resulting in profi t after taxes. Corporations may also choose to pay dividends 
against their after-tax profi ts which leaves them with undistributed profi ts, or savings. A cor-
porate savings rate called the