On the Importance of the Precautionary Saving Motive

In this paper, we rely on a direct question about precautionary wealth from the 1995 and 1998 Survey of Consumer Finances to assess the importance of the precautionary saving motive. Respondents are asked to report directly their desired amount of precautionary saving. Thus, we can work with a subjective measure of precautionary wealth. This allows us to bound the amount of precautionary accumulation and to overcome many of the problems of previous works on this topic. We find that a precautionary saving motive exists and affects almost every type of household. This motive is particularly important for two groups: older households and business owners, but it also affects young and middle-age households who do not have businesses. Overall, we provide strong evidence that we need to take the precautionary saving motive into account when modeling saving behavior.