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The marginal propensity to save (MPS) is an important concept in economics that describes how much of each additional dollar of income a person (or economy) chooses to save rather than spend. It plays a central role in Keynesian economic theory and helps economists understand how changes in income affect savings, spending, and overall economic activity.

But beyond theory — does MPS matter to you as an individual saver? Absolutely. Understanding MPS can help you become more mindful of how you handle income increases, whether from a raise, bonus, or side gig. What follows is a more in-depth look at marginal propensity to save, including what it means, why it matters, and how it applies to your personal financial life.

The Keynesian Economic Theory, Explained

British economist John Maynard Keynes revolutionized economic thinking with his 1936 book, The General Theory of Employment, Interest, and Money. His core idea was that economic downturns result from insufficient demand for goods and services, and that government spending can help stabilize the economy.

Keynes advocated for an increase in government spending during recessions and depressions, which would boost the production of goods and services to minimize unemployment rates and enhance economic activity. This theory went against the prevailing and long-held view that markets are self-regulating and any interference by the government could be harmful.

There are three main elements of this theory:

•   Aggregate demand: This is the total demand for goods and services in an economy. If demand drops too low (in other words, there is a lull in spending), a recession may follow.

•   Sticky prices and wages: Prices and wages are often slow to respond to changes in supply and demand, which can prolong unemployment or inflation.

•   Government intervention: Keynes advocated for government interventions like increased spending and lowering taxes to stimulate demand and pull the economy out of a downturn.

The Keynesian Multiplier describes the effect of increased government spending/investment as an economic stimulus. According to the multiplier, an increase in government spending leads to a greater-than-proportional increase in total economic output. In other words, the overall gain of government intervention is greater than the dollar amount spent.

The multiplier effect is directly influenced by the marginal propensity to save (MPS) and its counterpart, the marginal propensity to consume (MPC).

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Calculating Marginal Propensity to Save

MPS measures how savings behavior changes in response to a change in disposable income. The lower the MPS, the higher the multiplier effect of government spending or investment on total output, or gross domestic product (GDP). A low MPS supports Keynes’s premise that government spending can have a powerful effect on increasing aggregate demand and reducing unemployment during recessions.

Knowing the MPS helps policymakers estimate how effective spending or tax changes will be in stimulating the economy. A lower MPS (meaning people spend more and save less of their additional income) amplifies the effects of fiscal policy, which is central to Keynes’s approach to managing economic downturns.

Recommended: 7 Tips to Managing Your Money Better

Marginal Propensity to Save Formula

MPS is calculated with a specific formula:

MPS = Change in Savings / Change in Income.

Marginal Propensity to Save Example

Let’s say you receive a $1,000 bonus at the end of the year. Of that $1,000 increase in income, you decide to spend $300 on new clothes, $200 on a fancy dinner out, and save the remaining $500.

•   Change in income = $1,000

•   Change in savings = $500

•   MPS = $500 ÷ $1,000 = 0.5

This means you saved 50% of your additional income.

Marginal Propensity to Consume

Conversely, the marginal propensity to consume (MPC) is the change in the spending, or consuming amount. If someone’s income increases, the MPC measures the amount of income they choose to spend on goods and services instead of putting into different forms of savings.

The MPC formula is:

MPC = Change in Consumption / Change in Income.

By using the example above, the MPC would be 500 ÷1000 = 0.5.

Since income must be either saved or spent, the following must always be true:

MPS + MPC = 1

What MPS Means for You as a Consumer

While MPS is a tool economists use to measure national saving behavior, it also has implications on your personal finances. Understanding your own MPS can help you evaluate your spending vs. savings habits and take better control of your finances.

For example, if you find that you increase spending in line with any increases in income (meaning your MPS is at or near zero), it’s a sign you may be succumbing to lifestyle inflation, also known as lifestyle creep, which is the tendency to increase spending as income increases. It also indicates that you may want to consider increasing your savings rate — especially for emergencies, retirement, or other financial goals.

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Other Factors That Influence Saving

While MPS looks at changes in savings that result from changes in income, consumer savings behavior is influenced by other factors. Here’s a look at some other things that can affect saving and spending that are unrelated to income.

1. Wealth

Wealth (assets and investments) is separate from income. If your wealth increases — say through an inheritance, stock gains, or home appreciation — you may feel more comfortable saving less and spending more, even if your income hasn’t changed.

Alternatively, a decline in wealth might lead to reduced consumption and increased saving as a precaution.

2. Expectations

Future income expectations are also known to influence consumer spending and saving habits. For example, if you expect to get a raise or bonus, you may spend more now. If you fear a job loss or recession is looming, you might decide to tighten your budget. These shifts affect your saving behavior even without actual changes in income.

Debt

People also tend to adjust their consumption and savings if they’re in debt. For example, if you’re carrying high levels of credit card debt, you might be inclined to cut spending and increase savings to pay it down, even if your income hasn’t changed. Conversely, when debt levels are low and borrowing is easy, you may feel more free to spend.

Recommended: What is the Average Savings by Age?

Why Marginal Propensity to Save Matters

Using the data from MPS and MPC helps businesses and governments determine how funds are allocated. For example, economists can assess this data to determine whether increases in government spending, or investment spending, is having an influence on consumer saving and spending.

But understanding MPS isn’t just for economists and policymakers. Here’s why it may matter to you:

•   It helps you analyze how you use extra income.

•   It shows if your current spending habits align with your savings goals.

•   It can help you adjust behavior to avoid lifestyle inflation.

If you receive a raise or a financial windfall (like a bonus, inheritance, or cash gift), recognizing your personal MPS can help you make more strategic decisions, rather than impulsively spending the entire amount.

How to Start Saving Money

Whether you’ve recently experienced a boost in income, expect a raise or bonus in the future, or simply want to amp up your savings rate, these strategies can help.

Identifying Your Savings Goals

Consider what you’re saving for in the near-, mid- and long-term. For example:

•   Short-term goals: These might include building an emergency fund or saving for a small vacation.

•   Medium-term goals: This could include buying a car, a home improvement project, or a wedding.

•   Long-term: These are goals that are many years, even decades, away, such as retirement, sending a child to college, or achieving financial independence.

Once you’ve set some goals and timelines, you’ll want to figure out how much you need to set aside each month to reach those goals. If your goal is short-term, you might consider keeping your funds in a high-yield savings account. Online banks and credit unions tend to offer the highest rates.

“For money you’ll use in three to seven years, you may be prepared to take slightly more risk than a savings account,” says Brian Walsh, CFP® and Head of Advice & Planning at SoFi. “You might choose to use a brokerage account where you can invest that money in stocks, bonds, cash, or other asset classes. Just be sure to keep your comfort with risk in mind.”

For retirement saving, you’ll want to utilize retirement accounts, such as an employer-sponsored 401(k) or an individual retirement account (IRA).

Recommended: Emergency Fund Calculator

Creating a Budget

To free up funds for saving, it’s important to make a basic budget. You can do this by gathering up the last several months of financial statements and using them to determine your average monthly income and average monthly spending.

If you find that your average monthly cash outflow is the same or close to your average monthly cash inflow (meaning you’re not saving much or anything each month), you’ll want to comb through your expenses and look for places where you can cut back. Any money you free up can be siphoned into savings.

Alternatively, you might look for ways to increase your income, such as asking for a raise, freelancing, or starting a side hustle, then funnel those extra earnings right into savings.

The Takeaway

The marginal propensity to save, or MPS, is more than just an economic formula — it’s a practical tool that can help you reflect on how you manage your money. Whether you’re building an emergency fund, saving for home, or hope to retire some day, consider increasing your savings rate any time you get a raise, bonus, or any other increase in income.

Interested in opening an online bank account? When you sign up for a SoFi Checking and Savings account with eligible direct deposit, you’ll get a competitive annual percentage yield (APY), pay zero account fees, and enjoy an array of rewards, such as access to the Allpoint Network of 55,000+ fee-free ATMs globally. Qualifying accounts can even access their paycheck up to two days early.

FAQ

Can MPS be greater than 1?

No, the marginal propensity to save (MPS) cannot be greater than one. This is because MPS represents the proportion of an additional dollar of income that is saved, and it’s impossible to save more than the total amount of additional income received. MPS always ranges between 0 and 1.

How do you calculate the marginal propensity to save?

The marginal propensity to save (MPS) shows how much of an increase in income is saved rather than spent. You calculate it by dividing the change in savings by the change in income. The formula is: MPS = Change in Savings / Change in Income.

What is the difference between average and marginal propensity to save?

The average propensity to save (APS) is the proportion of total income that is saved. It’s calculated by dividing total savings by total income. The marginal propensity to save (MPS), on the other hand, indicates how much of an increase in income is saved. It’s calculated by dividing the change in savings by the change in disposable income.

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SOBNK-Q325-057

The typical options buyer generally seeks to profit from directional price moves in an underlying asset. However, there are some traders who aim to profit from other characteristics of options, such as volatility or time decay, by using strategies like delta-neutral positioning.

To pursue these trading strategies, investors may seek to minimize the effect of price changes and create portfolios that are more sensitive to other factors. A delta-neutral strategy does this by combining positions with offsetting deltas in order to create a net delta of zero overall.

What Is Delta?

Delta is one of the Option Greeks and measures how much an option will change in price, given a $1 change in the price of the underlying asset. By convention, the delta of a long position in the underlying asset is always 1, while a short position has a delta of -1.

What Does Delta Neutral Mean?

Delta neutral means that a position’s value is intended to remain stable when there are small market price changes. By holding a combination of assets and options, or combinations of various call and put options, a trader can create a portfolio with an overall delta of approximately zero.

Traders use delta-neutral strategies to reduce sensitivity to price changes while aiming to benefit from shifts in implied volatility, the time decay of options, or to hedge against existing positions.

How Does Delta Neutral Function?

A portfolio’s overall delta is determined by the sum of the deltas of its individual positions. Let’s take a closer look at delta in options and securities.

Basic Mechanics

An options trader holding shares (“going long”) benefits one-for-one from increases in the stock price. The delta for long shares is typically 1.

Investors short a stock will experience losses one-for-one as the share price rises, but they will benefit in the same amount when it falls. The delta for short shares is -1.

In the options trading world, a long call option has a delta of 0 to 1, while a long put option has a delta of –1 to 0.

Deep in-the-money long call options tend to have a delta near 1. Deep out-of-the-money long call options will have a delta near 0. At-the-money long call options typically have a delta near 0.5.

Deep in-the-money long put options typically have deltas near -1. Deep out-of-the-money long puts have deltas near 0 and at-the-money long puts have deltas near -0.5.

Delta’s values are for each individual security held and need to be adjusted based on your actual holdings. If you own 200 shares of stock, the delta for this position is 200. If you own an at-the-money call options contract, the delta for this position would be 100 x 0.5, or 50, due to options representing 100 shares of the underlying asset.

If you are writing (“going short”) options, the deltas values are reversed. If you write a call option with a delta of 0.75, then the delta for the position would be -75. Similarly, the delta for shares sold short is -1 per share.

The investor must also be aware that any delta-neutral portfolio will only retain its neutrality for a short period of time and over a narrow range of asset prices. Therefore, a portfolio must be constantly adjusted to maintain delta neutrality.

An Example of Delta-Neutral in Use

A trader might employ a delta-neutral trading strategy when they are long shares of stock but are concerned about a near-term pullback in its price. Assume the trader owns 100 shares of XYZ stock at $100 per share. A long stock position has a delta of 1. Multiplied by 100 shares, the position has a total delta of approximately 100.

The goal of a delta-neutral strategy is to use a combination of calls and puts to bring the portfolio’s net delta close to 0. One possibility is to purchase at-the-money put options that have a delta of -0.5. Two of these put option contracts (each with a delta of -0.5 a share) have a total delta of approximately -100 (-0.5 multiplied x 100 shares x 2 contracts). Recall that an options contract represents 100 shares of stock.

Here, the $100 strike acts as a temporary balance point for delta neutrality. As the underlying price moves away from $100, the delta of the portfolio will shift, and may require rebalancing to maintain neutrality. This shift happens because delta itself changes as the underlying asset changes — a second-order effect known as gamma.

Combining the deltas of 100 shares together with 2 long put option contracts with a -0.5 delta yields a delta-neutral portfolio.

Stock position delta = 100 shares x delta of 1 = 100

Long put position delta = 2 contracts x 100 shares/option x delta of -0.5 = -100

Portfolio delta = stock position delta + long put position delta

Portfolio delta = 100 + (-100) = 0 or delta neutral

The net position may offer downside risk reduction by being long put options while still having exposure to upside from the long stock position. Of course, using protective puts involves premium costs that may reduce overall returns.

A diagram might help illustrate how delta-neutral positioning works.

Profit & Loss Diagram Using the Above Example (Not Including the Put Option Cost)

Profiting From Delta-Neutral Trading

It is possible to profit from changes other than price movements in the underlying stock. For example, an options trader can use delta-neutral strategies to seek gains from declining or rising volatility. Vega is the Options Greek that measures the sensitivity of an option’s price to changes in volatility.

Delta-neutral strategies can also be used to capture potential value from time decay or — as in the earlier example — to hedge an existing long stock position. Writing options may allow you to benefit from the effect of time decay, but there is a risk of assignment. If the underlying stock price moves significantly, the contracts could be assigned to you.

Shorting Vega

Shorting vega is a more advanced options trading strategy, used to express a bearish view on implied volatility.

You might consider shorting volatility after a period of extreme movement in the market or a single stock. The key is to short vega when implied volatility is still high and there is an expectation it may decline.

When implied volatility is high, you pay a significant premium to be long options. You may seek to capitalize on elevated premiums by selling options while still being delta neutral. The risk is that implied volatility levels continue to increase further, which can lead to losses on a short vega play. Note: delta neutrality degrades due to gamma as prices move.

Waiting for Collapse in Volatility

A short vega position relies on the implied volatility on the underlying security to drop in order to turn a profit. It might take patience for implied volatility to revert toward historical averages. To remain delta neutral, other positions might need to be added to mitigate the risk of a change in the underlying stock price.

Pros and Cons of Delta Neutral Positions

Some of the pros of crafting a delta-neutral portfolio have been highlighted, but there are potential tradeoffs and risks as well. Having to closely monitor your portfolio can be a burden, while trading costs mount as you constantly layer on or reduce hedges to keep near delta neutral.

Delta-Neutral Straddle

A delta-neutral straddle strategy uses a combination of puts and calls to keep the position’s delta near zero while having exposure to volatility changes.

For example, if XYZ stock trades at $100, and it’s at-the-money call has a delta of 0.5 and it’s at-the-money put has a delta of -0.5, a trader might buy both options to establish a neutral position and then sell them if implied volatility increases. With this delta-neutral long straddle strategy, your delta is effectively 0 but you are long volatility.

A delta-neutral short straddle is an options trade that aims to benefit from limited price movement and a decline in implied volatility. The short straddle, as the inverse of the long straddle, may be used when implied volatility is expected to decrease.

Other options trading strategies that may benefit from volatility and time decay include calendar spreads, diagonal spreads, iron butterflies, and iron condors, among others.

The Takeaway

Building and maintaining a delta-neutral portfolio can be a challenging task, but the potential to benefit from time decay and volatility shifts may make it worthwhile.

Delta-neutral trading can also help reduce exposure to short-term declines while allowing investors to hold stock for the long-term.

SoFi’s options trading platform offers qualified investors the flexibility to pursue income generation, manage risk, and use advanced trading strategies. Investors may buy put and call options or sell covered calls and cash-secured puts to speculate on the price movements of stocks, all through a simple, intuitive interface.

With SoFi Invest® online options trading, there are no contract fees and no commissions. Plus, SoFi offers educational support — including in-app coaching resources, real-time pricing, and other tools to help you make informed decisions, based on your tolerance for risk.

FAQ

How do you make money with a delta-neutral strategy?

You may profit from a delta-neutral option strategy when there are changes in a stock’s variables beyond its share price. Changes in implied volatility can present opportunities to go long or short volatility while being agnostic to the stock price’s change. You can also benefit from time decay by selling options while being delta neutral.

What is a delta-neutral strike?

A delta-neutral strike refers to the price at which a portfolio is precisely balanced. In practice, this is an approximation rather than an exact level. As the underlying asset price moves, delta may shift away from zero; it will take additional hedging trades to get back to delta neutral.

How can you calculate the value of your delta-neutral position?

To calculate your position’s delta, multiply each security’s delta by your position size. For example, one call option contract with a delta of 0.75 has a delta of 75 (0.75 x 100 options per contract). Being long 100 shares of stock with a delta of 1 has a delta of 100 (1 x 100 shares).

You combine the deltas of all positions in your portfolio to determine your overall delta. At that point, you may trade options to make your portfolio delta neutral.

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