Precautionary Savings
Savings accumulated by households to self-insure against uncertain future income losses or unexpected expenses.
What is Precautionary Savings?
Precautionary savings are funds set aside beyond planned retirement or consumption goals, motivated by uncertainty about future income, employment, health, or other unexpected costs. In macroeconomic life-cycle models, precautionary saving is one of the three primary motives for household saving alongside planned retirement saving and bequest motives. Greater income uncertainty — such as during recessions or periods of widespread job insecurity — increases precautionary saving and reduces consumer spending, amplifying economic downturns through a negative feedback loop. Central banks and fiscal policymakers consider precautionary saving dynamics when evaluating the effectiveness of stimulus programs, since fear-driven saving can offset intended spending increases.
Example
During April 2020, the U.S. personal saving rate spiked to an all-time high of 33.8% as households cut discretionary spending sharply amid uncertainty about job security, medical costs, and the duration of lockdowns. This surge in precautionary savings temporarily dampened the fiscal stimulus impact of initial pandemic relief checks.