Saving and Insurance: Meaning of Saving and How Saving is Useful (For CBSE, ICSE, IAS, NET, NRA 2022)

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Meaning of Saving

Actually, people earn money to fulfil both their present and future needs. If they spend their whole income today, then nothing will remain for future and then they won՚t be able to satisfy their wants tomorrow. But if there is saving, then it can be used in future. So saving is the amount of income which is carried forward to future after meeting the current expenditure on goods and services and other things. This means that saving is the surplus of income over consumption. We can write that

Saving = Income – Consumption

How Saving is Useful

  • example. Mr. X saved ₹ 5000 last year. This implies that, in the beginning of the current year he starts with an extra ₹ 5000. So his income will increase by at least ₹ 5000 this year, provided his income and expenditure do not change. This means that, saving increases the future income of the person.
  • Saving can act as a kind of security for future.

Where You Keep Your Saving

  • It is a common practice in almost every household that, coins and currency notes of small denominations such as 50 paisa, Re. 1, ₹ 2 are put in a small saving box. A family saving box is an informal way of saving. It cannot be used for saving a big amount. It is also not safe to keep money in this manner because of the threat of theft. The money kept in the box also remains idle or unused till the time box is opened. Since it is a private affair, nobody else, except the particular family can use it. Finally, no reward is given in return for saving in this manner.
  • The most important thing is that, money needs a secured place to be kept. It is also needed for use. It should not be left idle. Think that you have a saving of ₹ 5000. If you do not use it for a long period, then it remains idle and useless like a dead wood. You are neither using it for yourself nor are you allowing anybody. Keeping all these things in mind society has provided institutions where you can keep your savings. They are post offices and commercial banks.

Post Office Savings Bank

The post office savings account or Post Office Savings Bank is a deposit scheme provided by the post office throughout India. The account provides a fixed interest rate on the account balance. It is a beneficial scheme for individual investors who wish to earn a fixed rate of interest by investing a significant portion of their financial assets. A passbook is provided by the post office to keep record of the transactions made by the holder of the account holder. If a person wants to issue a cheque book, then he/she has to keep a minimum balance of ₹ 500 in his/her account.

Savings Account in Commercial Bank

We have already said that commercial banks accept deposits from the public. An individual who wants to save money can open a saving account in the bank. The minimum amount necessary to open an account and minimum balance to be left after withdrawal of money are prescribed by the concerned bank where the person saves money. Like the post office, a bank also provides a passbook to the depositor which shows details of deposits and withdrawals and the balance available. A commercial bank allows a nominal rate of interest on the saving bank account.

Uses of Saving

Savings can be used for the purposes of lending and borrowing as well as development of the economy.

Lending and Borrowing
  • Lending and Borrowing: A person, who saves, can become a lender, because he has surplus money available with him presently. Many people in the society want to consume more than what their present income could allow for various reasons. These people can borrow money at the time of need and repay it in future.
  • Development of the Economy: When many individuals save money in post offices and banks, a very large amount of money becomes available for use by the society. We know that small drops taken together make an ocean. Similarly, an individual may be saving very less depending on how much he is earning and how much he is spending. But when many individuals start saving, they are added together to make a large amount. For a society, a large amount of money is required to build roads, office buildings, railway stations, street lights, amusement parks, schools etc. Because of this the whole country is benefited in future. So, saving by an individual eventually becomes useful in the process of development of the economy.

Interest as Return on Saving

One can use his/her saving to earn money which is called return on saving. This return is termed as Interest. How does this become possible? We know that a person who has saved money can become a lender by providing that money to a borrower who wants to borrow now. For the use of this saving, the lender can charge some money from the borrower which is called interest earned by the lender and paid by the borrower.

Rate of Interest

Rate of interest is defined as the earning by the lender/payment by the borrower for the use of every 100 Rupees given by the lender to the borrower for a period of one year.

Insurance

  • We are living in a world of uncertainty. This means we do not know what will happen in future. Many things are not in our control. Take the Example.
  • A farmer depends on a good rainfall so that he can produce large quantity of grains. But the farmer has no control over rainfall. If there is good rainfall, he gets good crop. But if there is no rainfall there will be drought and the farmer will incur heavy loss
  • Insurance is just like a good or product. Anybody who thinks that he/she has some chance to incur loss/suffer damages to his/her belongings, he/she can have “insurance” by paying some money. The seller of ‘insurance’ is called “insurer” and buyer of insurance is called “insured” . The money paid by the “insured” or buyer of insurance is called “premium” . Normally the premium is paid for a specified number of years. If any loss occurs during this period, then the insured person get due compensation from the insurer.

Definition of Insurance

Insurance can be defined as a financial product which can be purchased to partly or fully recovered any loss happening due to event beyond the control of the insured party.

Some Selected Insurance Products

Let us discuss in brief the following insurance products:

  • Auto Insurance: People who have scooters, bikes, cars etc. can buy auto insurance from a concerned insurance company. Since automobile is a durable good and has a long-life span, say 10 to 15 years, the insurance policy is made.
  • Health Insurance: Under health insurance scheme, a person who buys this insurance, can get back some amount of money out of his/her total expenditure on medical treatment. In this case also, the insurance company asks the interested person to pay a nominal amount as premium every year. Whenever the insured person falls ill and spends money on medical treatment, the insurance company gives some amount to reduce the burden of the person.
  • Life Insurance: A person can buy life insurance for a particular time period. The time period could be 10 or 25 years. Every year the insured person has to pay a certain amount of premium to the insurance company. The company gives back the claim to the person after the time period is over. The amount can also be paid in instalments by the insurance company on yearly basis also. If the person dies in between, the claim is given to his/her nominee, whom the person had named while buying life insurance.

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