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The marginal propensity to save (MPS) refers to the amount of disposable income a consumer is able to save. It’s used to reflect the proportion someone is willing to save for each additional dollar of their income.

To understand why MPS is important when quantifying fluctuations in savings and income, we’ll go over how to calculate MPS and how to apply it to your budgeting strategy.

What is the Marginal Propensity to Save?

The marginal propensity to save is defined as the portion of an increase in income that goes towards household savings. In other words, it’s the percentage of additional income a household saves instead of spending on goods and services, and it offers insight into the consumption habits of consumers.

MPS is also referred to as leakage, where the savings is an amount (expressed as a percentage that doesn’t go back into the economy via consumption. Typically, the more a household saves, the more likely it indicates that there is a higher income and better equipped to cover their household expenses.

So, theoretically, if a household saves 10%, it means that for every additional dollar they earn, they’ll save 10 cents.

When consumers are more likely to save as their income grows, the chances are higher they’ll become wealthier. Plus, households will also be able to access services and goods that require more money, such as larger homes in higher cost of living areas, elaborate vacations, or luxury vehicles.

How Income Level Affects Marginal Propensity to Save

Given data on household income and household saving, economists can calculate households’ MPS by income level. This calculation is important because MPS is not constant—it varies by income level. Typically, the higher the income, the higher the MPS because as wealth increases so does the ability to satisfy needs and wants, and so each additional dollar is less likely to go toward additional spending. However, the possibility remains that a consumer might alter savings and consumption habits with an increase in pay.

The Multiplier Effect

The MPS plays an important part in regulating the multiplier effect. The multiplier effect looks at the proportional increase or decrease in income that comes from consumption or savings.

For instance, if there is spending at the government level, it’ll have a multiplier effect (much like how a snowball rolls down a hill) on different parts of the economy. This change is due to the fact there is now additional disposable income consumers can spend on consumption and savings.

By understanding what the MPS is, economists can see how increased government spending can influence savings. It’ll also help to determine how consumers’ saving habits will influence the overall economy. The lower the MPS, the more of an impact on changes in government spending there will be.

Calculating the Marginal Propensity to Save

Calculating the MPS involves dividing the change in savings by a change in disposable income.

The following formula is used to calculate the MPS:

MPS = change in savings / change in disposable income

The savings represented by the value of the MPS will change if income changes by a dollar. Presented on a graph, the MPS is the equivalent of the savings line that’s created by plotting changes in income on the horizontal line (x-axis) and changes in savings on the vertical line (y-axis).

Another important point to note is that MPS will range between zero and one. If the MPS is zero, then it means changes in income doesn’t have an effect on savings (consumers spend all additional income). If MPS is one, then all additional income is saved.

Example

Jasmine successfully negotiated a promotion and annual bonus and received an additional $3,000 with her next paycheck. Jasmine decides she wants to spend this amount on a nice dinner out with friends totaling $150, and a vacation in Mexico for $2,000. The total she spends out of her bonus is $2,150, saving $850.

Using the above MPS formula, the calculation is as follows:

$850 / $3,000 = 0.283 = 28.3%

Therefore, Jasmine saved 28% of her additional income or 28 cents for each additional dollar she earns.

Remember, MPS isn’t constant since various factors in addition to changes in income will influence consumer spending habits. For instance, the time of the year can influence seasonal trends, which can correlate with higher spending.

Applying MPS to Your Budget Strategy

Though it seems like MPS is more for economists, you can apply this tactic to your personal budget.

When it comes to increasing your income, it might be tempting to spend a large portion of it. After all, you might want to celebrate a pay raise or promotion. Or, you might decide to increase your grocery budget, swapping out some of your regular produce for organic varieties.

However, there are benefits to saving some of the extra money. Perhaps you have a financial goal you can use it towards, like saving for a down payment on a house. Or you want to start investing and with this boost in income, you now have the means to do so.

If you haven’t yet decided what you’re saving for, just getting into the habit of saving will get you on the right track. Plus, you’ll learn how to budget effectively, no matter which type of budgeting technique you use.

Let’s say you want to be able to set aside 20% of each paycheck towards investments and a larger emergency fund. You received a $1,000 bonus from work this month and want to make sure you’re not tempted to spend it all.

Using the above formula, you want to have an MPS of 30%, or 0.3. That means with that bonus, you want to be able to save $300, allowing you to put $800 of it towards other areas in your budget. Once you have this number, you can take proactive steps to save that money. Automatically transferring $300 to a separate savings account is a good start.

Considering your income may fluctuate, you’ll probably want to revisit this formula on occasion to make sure you’re on track. Plus, it’s likely your spending habits will also change—such as spending more during the holidays—so if you need to spend more, then you can adjust your savings rate temporarily. At the end of the day, it’s all about being aware of where your money is going.

Recommended: 39 Ways to Earn Passive Income Streams

The Takeaway

Marginal propensity to save may seem like a term that doesn’t relate to your budget since it’s normally used to help economists. However, thinking about it in simple terms such as a savings rate is more helpful. That way, you can use it to apply it towards your savings goals and budgeting tactics as your income changes.

Saving money is half the battle: making sure your money is working for you is the other half. Opening a checking and savings account with SoFi can earn you more than the national interest average, squeezing even more value from your hard-earned dollars.

Photo credit: iStock/Toxitz

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SoFi members with direct deposit activity can earn 4.60% annual percentage yield (APY) on savings balances (including Vaults) and 0.50% APY on checking balances. Direct Deposit means a deposit to an account holder’s SoFi Checking or Savings account, including payroll, pension, or government payments (e.g., Social Security), made by the account holder’s employer, payroll or benefits provider or government agency (“Direct Deposit”) via the Automated Clearing House (“ACH”) Network during a 30-day Evaluation Period (as defined below). Deposits that are not from an employer or government agency, including but not limited to check deposits, peer-to-peer transfers (e.g., transfers from PayPal, Venmo, etc.), merchant transactions (e.g., transactions from PayPal, Stripe, Square, etc.), and bank ACH funds transfers and wire transfers from external accounts, do not constitute Direct Deposit activity. There is no minimum Direct Deposit amount required to qualify for the stated interest rate.

SoFi members with Qualifying Deposits can earn 4.60% APY on savings balances (including Vaults) and 0.50% APY on checking balances. Qualifying Deposits means one or more deposits that, in the aggregate, are equal to or greater than $5,000 to an account holder’s SoFi Checking and Savings account (“Qualifying Deposits”) during a 30-day Evaluation Period (as defined below). Qualifying Deposits only include those deposits from the following eligible sources: (i) ACH transfers, (ii) inbound wire transfers, (iii) peer-to-peer transfers (i.e., external transfers from PayPal, Venmo, etc. and internal peer-to-peer transfers from a SoFi account belonging to another account holder), (iv) check deposits, (v) instant funding to your SoFi Bank Debit Card, (vi) push payments to your SoFi Bank Debit Card, and (vii) cash deposits. Qualifying Deposits do not include: (i) transfers between an account holder’s Checking account, Savings account, and/or Vaults; (ii) interest payments; (iii) bonuses issued by SoFi Bank or its affiliates; or (iv) credits, reversals, and refunds from SoFi Bank, N.A. (“SoFi Bank”) or from a merchant.

SoFi Bank shall, in its sole discretion, assess each account holder’s Direct Deposit activity and Qualifying Deposits throughout each 30-Day Evaluation Period to determine the applicability of rates and may request additional documentation for verification of eligibility. The 30-Day Evaluation Period refers to the “Start Date” and “End Date” set forth on the APY Details page of your account, which comprises a period of 30 calendar days (the “30-Day Evaluation Period”). You can access the APY Details page at any time by logging into your SoFi account on the SoFi mobile app or SoFi website and selecting either (i) Banking > Savings > Current APY or (ii) Banking > Checking > Current APY. Upon receiving a Direct Deposit or $5,000 in Qualifying Deposits to your account, you will begin earning 4.60% APY on savings balances (including Vaults) and 0.50% on checking balances on or before the following calendar day. You will continue to earn these APYs for (i) the remainder of the current 30-Day Evaluation Period and through the end of the subsequent 30-Day Evaluation Period and (ii) any following 30-day Evaluation Periods during which SoFi Bank determines you to have Direct Deposit activity or $5,000 in Qualifying Deposits without interruption.

SoFi Bank reserves the right to grant a grace period to account holders following a change in Direct Deposit activity or Qualifying Deposits activity before adjusting rates. If SoFi Bank grants you a grace period, the dates for such grace period will be reflected on the APY Details page of your account. If SoFi Bank determines that you did not have Direct Deposit activity or $5,000 in Qualifying Deposits during the current 30-day Evaluation Period and, if applicable, the grace period, then you will begin earning the rates earned by account holders without either Direct Deposit or Qualifying Deposits until you have Direct Deposit activity or $5,000 in Qualifying Deposits in a subsequent 30-Day Evaluation Period. For the avoidance of doubt, an account holder with both Direct Deposit activity and Qualifying Deposits will earn the rates earned by account holders with Direct Deposit.

Members without either Direct Deposit activity or Qualifying Deposits, as determined by SoFi Bank, during a 30-Day Evaluation Period and, if applicable, the grace period, will earn 1.20% APY on savings balances (including Vaults) and 0.50% APY on checking balances.

Interest rates are variable and subject to change at any time. These rates are current as of 10/24/2023. There is no minimum balance requirement. Additional information can be found at https://www.sofi.com/legal/banking-rate-sheet.

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Since the onset of the COVID-19 pandemic, millions of Americans received stimulus checks from the federal government. As of March 2021, a year into the pandemic, the third round of stimulus checks have been approved with the American Rescue Plan Act.

This package includes one time payments of $1,400 for individuals making $75,000 or less and per person for couples earning $150,000 or less. Additionally, those with dependents would qualify for another $1,400 per child. The IRS sent out “Economic Impact Payments” as checks in the mail or electronically via direct deposit.

The stimulus checks are a measure to provide financial relief to millions of Americans. Many people used the proceeds of the checks to pay for food, utilities, credit card bills and other expenses while others saved the money for future emergencies.

The federal government also provided stimulus checks in 2008. The amount was much lower—individuals received $600 and couples filing jointly received up to $1,200.

These economic impact payments could be used by consumers in several ways, including paying off debt such as credit cards or private student loans, starting an emergency fund, or by investing the money for retirement.

Paying Off Debt

The additional $1,400 can come in handy for people who want to pay off their debt, especially higher interest debt such as credit cards. Consumers could use all or a portion of the stimulus payment to make extra payments on a credit card, loan, or other debt. Additional payments could go towards the principal portion of what is owed, or what the consumer originally borrowed, helping pay down the interest faster; if you want to do this, it’s smart to contact the lender to let them know and ensure those extra payments are applied to the principal balance.

People who still have other credit card debt could look into obtaining a personal loan. Generally, personal loans have lower interest rates than credit card debts. Securing a lower interest rate could potentially help expedite debt repayment, so long as the repayment term is not extended.

For some, student loan debt may be a focus. In March 2020, the CARES Act temporarily paused federal student loan payments, reduced interest rates to 0% on all federal student loans, and temporarily halted collections on federal student loans in default. These protections have now been extended through Aug. 31, 2022. This does not apply to private student loans. The stimulus payment could help a borrower pay down their federal student loans or make extra payments.

Some may consider refinancing their student loans, should they be able to qualify for a lower fixed or variable interest rate, or preferable lending terms. This can make sense for some borrowers, especially those who already hold private student loans, but won’t be right for everyone. Federal loans offer borrower protections that private loans do not, so borrowers with federal student loans may want to consider all of their options carefully. Refinancing federal student loans eliminates them from all federal benefits, including the temporary relief offered by the CARES Act.

Starting an Emergency Fund

An emergency fund comes in handy to pay rent or a mortgage, auto loan, student loans, or credit cards if you lose your job or your hours are slashed. Finding another full-time or part-time job could take several weeks or months and the additional money could be useful.

Saving for an emergency fund can be difficult after paying your bills each month. The money from the stimulus check could provide a boost to help start a rainy day fund. Having the extra savings can help prevent someone from having to rely on their credit cards and rack up more debt in case there is an emergency, say something like a last minute car repair or a sudden illness.

Having the extra money can also be a relief in the event of a job-loss since it can take several weeks for unemployment funds to arrive.

General recommendations suggest that people save three to six months of expenses in their emergency fund. In some situations, it may make sense to save more than three to six months worth of expenses. For example, freelancers with a fluctuating income may want to have more saved up. If you are not sure how much money you need, look at your monthly bills and determine which ones you can’t ignore if you lost your job for an extended period.

Another way to gauge how much to save in an emergency fund is to factor in things like the deductibles for your car and health insurance in case there is an accident and you need to make repairs to the auto or you get injured.

Starting an emergency fund with the money from your stimulus check is one way to get started. From there, more money can be added to your savings account whenever you get the opportunity. There are many ways to stash more money into your rainy day fund. Clean out your closet and see if there are any items you can sell online such as electronics, clothing, a bike, or musical instrument.

Save the money earned from a part-time job, freelance work, or your annual tax refund. Or review your budget and see if there is anything you can cut such as a streaming service you rarely use.

Those in a comfortable financial position, could transfer some money automatically from your weekly or bi-weekly paycheck into a new savings account. The amount could be small, but even $25 a week adds up over a year.

Investing the Stimulus Check

The extra money from the stimulus check could also be an investment. Depending on individual financial circumstances, the stimulus check could be used to make a contribution to a retirement account like an IRA. Others may be focusing on other goals like a downpayment for a house, a vacation, a wedding, or a home remodel.

Once you open an account and start putting money towards it weekly or even monthly, you may see the balance grow, especially as the investments appreciate in value and interest compounds

The Takeaway

The stimulus checks are intended to provide temporary relief to those struggling due to the unprecedented challenges caused by the coronavirus pandemic. How you use the money will depend on your individual circumstances. Some options include paying down debt, establishing an emergency fund, or investing.

A SoFi checking and savings account could be one place to stash your stimulus check. Getting started is as easy as depositing the stimulus check. From there, SoFi Checking and Savings makes it easy to earn interest and receive cash back on purchases. A SoFi Checking and Savings account allows you to spend, save, and earn money from one place. There are no account fees and your cash balance earns interest. The interest rate and fee structure is subject to change at any time, but SoFi aims to offer competitive interest rates and not charge any account fees.

With SoFi, account holders can create financial vaults within a SoFi Checking and Savings account for different reasons such as an emergency fund or investing account.

SoFi® Checking and Savings is offered through SoFi Bank, N.A. ©2022 SoFi Bank, N.A. All rights reserved. Member FDIC. Equal Housing Lender.
SoFi Money® is a cash management account, which is a brokerage product, offered by SoFi Securities LLC, member
FINRA / SIPC . SoFi Securities LLC is an affiliate of SoFi Bank, N.A. SoFi Money Debit Card issued by The Bancorp Bank.
SoFi has partnered with Allpoint to provide consumers with ATM access at any of the 55,000+ ATMs within the Allpoint network. Consumers will not be charged a fee when using an in-network ATM, however, third party fees incurred when using out-of-network ATMs are not subject to reimbursement. SoFi’s ATM policies are subject to change at our discretion at any time.
SoFi members with direct deposit activity can earn 4.60% annual percentage yield (APY) on savings balances (including Vaults) and 0.50% APY on checking balances. Direct Deposit means a deposit to an account holder’s SoFi Checking or Savings account, including payroll, pension, or government payments (e.g., Social Security), made by the account holder’s employer, payroll or benefits provider or government agency (“Direct Deposit”) via the Automated Clearing House (“ACH”) Network during a 30-day Evaluation Period (as defined below). Deposits that are not from an employer or government agency, including but not limited to check deposits, peer-to-peer transfers (e.g., transfers from PayPal, Venmo, etc.), merchant transactions (e.g., transactions from PayPal, Stripe, Square, etc.), and bank ACH funds transfers and wire transfers from external accounts, do not constitute Direct Deposit activity. There is no minimum Direct Deposit amount required to qualify for the stated interest rate.

SoFi members with Qualifying Deposits can earn 4.60% APY on savings balances (including Vaults) and 0.50% APY on checking balances. Qualifying Deposits means one or more deposits that, in the aggregate, are equal to or greater than $5,000 to an account holder’s SoFi Checking and Savings account (“Qualifying Deposits”) during a 30-day Evaluation Period (as defined below). Qualifying Deposits only include those deposits from the following eligible sources: (i) ACH transfers, (ii) inbound wire transfers, (iii) peer-to-peer transfers (i.e., external transfers from PayPal, Venmo, etc. and internal peer-to-peer transfers from a SoFi account belonging to another account holder), (iv) check deposits, (v) instant funding to your SoFi Bank Debit Card, (vi) push payments to your SoFi Bank Debit Card, and (vii) cash deposits. Qualifying Deposits do not include: (i) transfers between an account holder’s Checking account, Savings account, and/or Vaults; (ii) interest payments; (iii) bonuses issued by SoFi Bank or its affiliates; or (iv) credits, reversals, and refunds from SoFi Bank, N.A. (“SoFi Bank”) or from a merchant.

SoFi Bank shall, in its sole discretion, assess each account holder’s Direct Deposit activity and Qualifying Deposits throughout each 30-Day Evaluation Period to determine the applicability of rates and may request additional documentation for verification of eligibility. The 30-Day Evaluation Period refers to the “Start Date” and “End Date” set forth on the APY Details page of your account, which comprises a period of 30 calendar days (the “30-Day Evaluation Period”). You can access the APY Details page at any time by logging into your SoFi account on the SoFi mobile app or SoFi website and selecting either (i) Banking > Savings > Current APY or (ii) Banking > Checking > Current APY. Upon receiving a Direct Deposit or $5,000 in Qualifying Deposits to your account, you will begin earning 4.60% APY on savings balances (including Vaults) and 0.50% on checking balances on or before the following calendar day. You will continue to earn these APYs for (i) the remainder of the current 30-Day Evaluation Period and through the end of the subsequent 30-Day Evaluation Period and (ii) any following 30-day Evaluation Periods during which SoFi Bank determines you to have Direct Deposit activity or $5,000 in Qualifying Deposits without interruption.

SoFi Bank reserves the right to grant a grace period to account holders following a change in Direct Deposit activity or Qualifying Deposits activity before adjusting rates. If SoFi Bank grants you a grace period, the dates for such grace period will be reflected on the APY Details page of your account. If SoFi Bank determines that you did not have Direct Deposit activity or $5,000 in Qualifying Deposits during the current 30-day Evaluation Period and, if applicable, the grace period, then you will begin earning the rates earned by account holders without either Direct Deposit or Qualifying Deposits until you have Direct Deposit activity or $5,000 in Qualifying Deposits in a subsequent 30-Day Evaluation Period. For the avoidance of doubt, an account holder with both Direct Deposit activity and Qualifying Deposits will earn the rates earned by account holders with Direct Deposit.

Members without either Direct Deposit activity or Qualifying Deposits, as determined by SoFi Bank, during a 30-Day Evaluation Period and, if applicable, the grace period, will earn 1.20% APY on savings balances (including Vaults) and 0.50% APY on checking balances.

Interest rates are variable and subject to change at any time. These rates are current as of 10/24/2023. There is no minimum balance requirement. Additional information can be found at https://www.sofi.com/legal/banking-rate-sheet.

External Websites: The information and analysis provided through hyperlinks to third-party websites, while believed to be accurate, cannot be guaranteed by SoFi. Links are provided for informational purposes and should not be viewed as an endorsement.

Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.

SoFi Student Loan Refinance
If you are a federal student loan borrower, you should consider all of your repayment opportunities including the opportunity to refinance your student loan debt at a lower APR or to extend your term to achieve a lower monthly payment. Please note that once you refinance federal student loans you will no longer be eligible for current or future flexible payment options available to federal loan borrowers, including but not limited to income-based repayment plans or extended repayment plans.

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