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In order for an economy to work well for the long term, it needs to have a good balance between saving and consumption. This is because both saving and consumption require sacrifices.
When we consume in the current period, we do not save. Every dollar that we spend on consumption is one that we do not save. When we do not save, we are also not able to invest. For individuals, this means they will not have money for retirement. For businesses and the economy as a whole, it means that they will not invest in new capital goods that will lead to growth in the future. So, when we consume in the present, we give up the chance to invest in the future.
If we save in the current period, we do not consume. We save and invest for the future. But this takes away from our ability to do things in the short term. On the individual level, this means that we cannot spend on luxuries. For the economy as a whole, it means that GDP is likely to drop because there is not enough consumer spending. Less consumer spending means that businesses might have to lay people off. When we save too much, we give up current prosperity for future growth.
Thus, we give up something when we save and when we consume. Therefore, we need to try to balance these two uses of our money in the current period.
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