Marginal Propensity to Save

The Marginal Propensity to Save (MPS) is a concept from macroeconomics that measures how much of an extra dollar of income a person or an entire economy saves rather than spends. Think of it as your personal “save vs. splurge” reflex when you get a pay raise or a surprise bonus. If you receive an extra $100 and you decide to stash $25 of it in your savings account, your Marginal Propensity to Save is 0.25 (or 25%). This simple metric is surprisingly powerful, offering a glimpse into consumer behavior, economic health, and the potential impact of government policies. It’s the flip side of the Marginal Propensity to Consume (MPC), which measures how much of that extra dollar you spend. Together, these two concepts tell the complete story of what happens to new income flowing into an economy.

At its heart, the MPS is about what happens at the “margin”—with the next dollar you earn, not your total income. This distinction is crucial for understanding economic shifts and consumer psychology.

The relationship between saving and spending an extra dollar is a zero-sum game. If you don't spend it, you must save it. This gives us a beautifully simple formula:

• MPS + MPC = 1

This means if you know a person's MPS, you automatically know their MPC, and vice versa. Let's use an example. Imagine you get a $500 bonus after taxes.

• You decide to put $150 into your investment account.
• You spend the remaining $350 on a weekend getaway.

Your MPS is calculated as the change in savings divided by the change in income:

• MPS = $150 / $500 = 0.3

And your MPC is the change in consumption divided by the change in income:

• MPC = $350 / $500 = 0.7

Sure enough, 0.3 + 0.7 = 1.

A person's (or a country's) MPS isn't fixed; it's influenced by several factors:

• Income Level: Generally, the wealthier you are, the higher your MPS. Someone living paycheck to paycheck will likely spend any extra income on necessities (a very high MPC and low MPS). In contrast, a high-earner who already has their needs met is more likely to save a larger portion of any additional income.
• Economic Outlook: When people are worried about a potential recession or losing their jobs, they tend to save more as a precaution. This “rainy day” mindset increases the MPS across the economy. This can lead to the famous Paradox of Thrift, where increased saving by everyone can actually hurt the economy by reducing overall demand.
• Interest Rates: Higher interest rates can make saving more attractive, potentially nudging the MPS upward. Why spend today when you can earn a handsome return by saving for tomorrow?
• Government Policies: Tax cuts and stimulus programs are often designed with MPS in mind. A tax cut aimed at lower-income households is expected to be mostly spent (low MPS), stimulating the economy quickly. A cut for the wealthiest, however, might be largely saved (high MPS), providing less of an immediate economic jolt.

While MPS is a macroeconomic tool, a savvy value investor can use it to make smarter decisions. It provides crucial context about the economic environment and consumer behavior.

Tracking the national MPS can act as an early warning system. If you see reports that the aggregate MPS is rising sharply, it signals that consumers are getting nervous. They are pulling back on spending and building up their cash reserves. This is often a precursor to an economic slowdown, which could negatively impact corporate earnings and stock valuations. A declining MPS, on the other hand, suggests growing confidence and can signal a strengthening economy.

MPS helps you analyze companies that depend on consumer spending.

• High-End Retailers: Companies selling luxury goods to wealthy clients may be more resilient during downturns because their customer base has a naturally high MPS and can maintain spending even while saving more.
• Discount Retailers & Staple Goods: These businesses cater to customers with a lower MPS (and thus a high MPC). In good times, they do well, and during times of economic stimulus, they can benefit disproportionately as people spend their extra cash on immediate needs and wants.
• Financial Services: Banks and asset managers can benefit from a higher MPS, as more money flows into savings accounts, retirement funds, and other investment products.

By understanding the MPS of a company's target audience, you can better predict its future performance under different economic scenarios. It’s another valuable tool in your analytical toolkit for finding wonderful companies at fair prices.