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.
Key Points
• Marginal propensity to save (MPS) measures the proportion of additional income consumers save rather than spend.
• MPS is calculated as the change in savings divided by the change in income.
• Lower MPS generally boosts the economy through increased spending.
• Tips for increasing personal savings including setting goals, budgeting, and using high-yield accounts.
• Understanding MPS can help you manage lifestyle inflation and align your spending and saving with your goals.
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.
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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.
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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 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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