Chapter 6, Problem 22AA

To determine

To evaluate:If saving is better than using credit cards or taking loans.

Explanation of Solution

Often people are forced to wait for something to be bought outright because their financial condition does not allow them to take on further debt. Yet even though people can afford a substantial purchase, putting it off may be best once they have the money in hand. Saving up and paying cash may allow a better price to be negotiated for a non-emergency big-ticket item.

While interest rates for the savings account are not especially favorable at this moment, any interest that comes in is better than the interest that goes out, making savings at least modestly superior to debt. Even with big-ticket products, such as a car or a home, saving for a down payment (or a bigger down payment) helps people to get a smaller loan and even reduces the total borrowing cost.

Economics Concept Introduction

Introduction: Saving is the act of putting money aside for potential expenditures or needs. You want to have the cash available fairly quickly when you want to save money, maybe to use immediately. Yet saving can also be used for long-term goals, particularly when you want to be sure that you will have the money in the future at the right time.