Precautionary Saving
Extra saving a household holds to cushion against uncertain future income -- distinct from saving for a planned goal like retirement or a house down payment. The buffer grows with both the variance of expected income and the degree of concavity in the household's utility function (technically, the third derivative called prudence). Precautionary saving is why income-volatile households save more than income-stable ones with the same average income, and why portfolio cash buffers should grow when career or business income becomes lumpier.
Lessons that use this term
Related terms
Ambiguity Aversion · Anchored Assumption · Asset Beta · Bank ROE Spread · Banker Pitch Deck · Beta
Open this term in the app → — no account needed; browse the full glossary while you research.