When Savings Curve Cuts Consumption Curve from Under

When Savings Curve Cuts Consumption Curve from Under

In a previous piece, I explained the relationship between the consumption and savings functions with respect to the psychological law. To reiterate, according to Lord Maynard Keynes, that out of every penny increase in the income of an individual, consumption increases along with savings, but the former increases faster than the latter. In other words, a greater proportion of the increase is consumed.  To further flesh out my point, consider an amalgamation of the savings and consumption functions in Figure 1 below.

The two functions are directly determined by the changes in disposable income, and run parallel to each other. This relationship subsists as long as the psychological law remains true. And since man is a creature of habit, the law doesn’t change. At point A, when income was zero (0), for the individual to be able to consume at point B (autonomous consumption), he had to dis-save: running down assets, borrowing, etc. At point C, the individual now earns and his income equals his consumption, in other words, he saves nothing. From this point above, his savings starts growing in response to the rising income as shown on the vertical axis. The slope of the consumption curve is steeper than the savings curve, meaning that the former rises faster than the latter, thus giving no chance for savings to catch up.

I said earlier that man is a creature of habit, another truth is, since the universe is in a constant flux, change is inevitable. What then can change the psychological law? A strong resolve to create wealth can! You my friend must have seen the psychological law at play in your finances and believe you cannot change it. Yes, you can! If you decide today to consume less and save more out of every naira increase of your income, you will notice the phenomenon in Figure 2. Your savings curve will then rise faster than the consumption curve, intercept it from beneath, and rise above it. At this point you are becoming richer and securing your future. The fear of suddenly losing your job, or any other fear related to money will diminish.

Before the Covid-19 spread round the world and was later declared a pandemic, interest rates crashed. The Treasury Bill was worst hit. And now in the face of plummeting prices globally and the likelihood of the naira losing against other currencies, having in mind that crude oil price have dropped below the national budget benchmark. Why not free yourself from Keynes psychological law of consumption by making your own rules. Decide to consume less and save more today.

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2 thoughts on “When Savings Curve Cuts Consumption Curve from Under

    1. Thank you Sebby. Good you learned something from my little expose. I guess you may want to read it again by inter-changing the positions of the two diagrams.


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