Introduction to Finance

DISCUSSION QUESTION 2
What is a reasonable personal savings rate for individuals in the United States?
LEARNING ACTIVITY
Go to the website of the Bureau of Economic Analysis, http://www.bea.gov, and fi nd 
current information on the size of disposable personal income and personal savings.
7.4
Factors Aff ecting Savings
Several factors infl uence the total amount of savings in any given period:
• Level of income
• Economic expectations
• Cyclical infl uences
• Life stage of the individual saver or corporation 
TA B L E 7 . 5
Nonfinancial Corporate Savings in the United States ($ Billions)
2006
2009
2012
2015
Profits before taxes (with IVA and CCAdj)
1,015.0
718.1
1,149.7
1,238.5
Less: tax liabilities
307.7
177.8
266.7
346.6
Profits after taxes
707.3
540.2
883.0
891.9
Less: 
dividends
471.1
351.4
517.9
585.8
Undistributed profits
236.2
188.9
365.0
306.1
Retention rate (undistributed profits/profits 
after 
taxes)
33.4%
35.0%
41.3%
34.3%
Addenda:
Profits before taxes (without IVA and CCAdj)
1,180.1
752.5
1,241.4
1,448.5
Inventory valuation adjustment (IVA)
–35.7
6.7
–14.2
61.5
Capital consumption adjustment (CCAdj)
–129.4
–41.1
–77.6
–271.4
Where: IVA is an inventory valuation adjustment, and CCAdj is a capital consumption adjustment.
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
The precise relationship between savings and consumption is the subject of much debate and 
continuing study, however, and we limit our observations here to broad generalizations.
Levels of Income
Recall that personal saving is personal income less personal taxes less personal outlays (primarily 
consumption expenditures). Keeping this defi nition in mind, let us explore the eff ect of changes 
in income on the levels of savings of individuals. As income falls, the individual attempts to 
maintain his or her present standard of living as long as possible. In so doing, the proportion 
of his or her consumption spending increases and total savings diminish. As income is further 
reduced, the individual may be forced to curtail consumption spending, which results in a 
lower standard of living. Such reduction is reasonably limited, however, since the basic needs 
of the individual or family unit must be met. Not only will personal savings be eliminated when 
income is drastically reduced, but the individual may also engage in