What is precautionary saving in simple terms?

Putting extra money aside because future income feels uncertain.

How does social insurance affect it?

Insurance reduces risk, so people need smaller cushions.

Precautionary Saving

📈 Economics By CampusDown Wiki Editorial Team Last updated October 27, 2026 Views 7

Precautionary saving is the extra saving households do when future income is uncertain, as a buffer against bad outcomes such as job loss or illness. It extends consumption theory by showing that risk, not just expected income, shapes saving.

Contents

1. Uncertainty and saving
2. Prudence
3. Buffer stocks
4. FAQ
5. References

Uncertainty and saving

Basic permanent income and life-cycle models focus on expected income. Leland (1968) showed risk can raise saving; Zeldes (1989) and Skinner (1988) quantified it.

Prudence

Kimball (1990) named convex marginal utility prudence, the condition for precautionary saving. Carroll and Kimball (1996) showed it makes consumption concave in wealth.

Buffer stocks

Deaton (1991) analysed saving under liquidity constraints and Carroll (1997) proposed the buffer-stock model, explaining why social insurance lowers saving and recessions raise it, relevant to fiscal policy debates.

FAQ

What is precautionary saving in simple terms?: Putting extra money aside because future income feels uncertain.
How does social insurance affect it?: Insurance reduces risk, so people need smaller cushions.

Sources reviewed: 2026-10-26

References

Leland, H. E. (1968). Saving and uncertainty: The precautionary demand for saving. Quarterly Journal of Economics, 82(3), 465–473. The first formal treatment.
Skinner, J. (1988). Risky income, life cycle consumption, and precautionary savings. Journal of Monetary Economics, 22(2), 237–255. Size in a life-cycle model.
Zeldes, S. P. (1989). Optimal consumption with stochastic income: Deviations from certainty equivalence. Quarterly Journal of Economics, 104(2), 275–298. Numerical consumption model.
Kimball, M. S. (1990). Precautionary saving in the small and in the large. Econometrica, 58(1), 53–73. Defines prudence.
Deaton, A. (1991). Saving and liquidity constraints. Econometrica, 59(5), 1221–1248. Liquidity constraints.
Carroll, C. D., & Kimball, M. S. (1996). On the concavity of the consumption function. Econometrica, 64(4), 981–992. Concave consumption function.
Carroll, C. D. (1997). Buffer-stock saving and the life cycle/permanent income hypothesis. Quarterly Journal of Economics, 112(1), 1–55. Buffer-stock model.

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This article was last updated on October 27, 2026. It is based on widely recognized original works and textbooks; when citing it in a paper, please check the original sources listed in the references.