What it means
Saving is what is left after spending is taken out of income, so dissaving is simply that figure turning negative. A household earning $54,000 and spending $61,500 has to find the missing $7,500 somewhere, which means a savings account, a credit card, a loan or family support.
Dissaving is not automatically a problem. It is exactly what savings are for, and the classic case is a retiree deliberately drawing down a pension pot built over forty years, or a student borrowing against future earnings.
It becomes a problem when it is unplanned or open-ended. The distinction to watch is whether there is a stock of savings being drawn down towards a known end point, or a deficit being funded by ever-growing debt with no plan for closing it.
At the level of a whole economy, the household savings rate turning negative is treated as a warning signal, since it usually means consumption is being supported by borrowing rather than by earnings. Aggregate figures can mislead, though, because a small number of heavy savers can mask widespread dissaving lower down the income scale.
For businesses the same idea appears as burning cash, where operating outflows exceed inflows and reserves fall. A funded startup dissaving against a plan is behaving normally; an established company doing the same without a financing plan is on a countdown.
Interest rates shift the picture in both directions. Higher rates make borrowing to cover a shortfall expensive and reward holding savings, while a long stretch of low rates makes running down a cash buffer look almost costless, which is one reason national savings rates tend to drift with the rate cycle.
In practice
Real-world examples.
Example
A retired couple with a $620,000 pension pot draw $46,000 a year against investment income of $28,000. The $18,000 difference is planned dissaving, sized so the capital lasts through a thirty year retirement.
Example
A seasonal ski equipment retailer spends $180,000 more than it collects between May and September every year. The summer dissaving is funded from a winter surplus of roughly $260,000 and is a normal feature of the business rather than a distress signal. The owner only worries when the surplus falls below the size of the summer gap.
Example
During a downturn a national statistics office reports the household savings rate falling from 6.2% to -1.4%. Consumer spending holds up, but the support comes from savings buffers and credit rather than from wages.
Formula
Calculation
Saving = disposable income - consumption. A negative result is dissaving.
Savings rate = saving / disposable income
A household has disposable income of $54,000 for the year, after tax, and spends $61,500 across housing, food, transport and everything else.
Saving: $54,000 - $61,500 = -$7,500
Savings rate: -$7,500 / $54,000 = -0.1389, or about -13.9%
The household is dissaving $7,500 a year. If it started with $30,000 in savings and nothing else changes, the money lasts $30,000 / $7,500 = 4 years, after which the shortfall must be met by borrowing or by cutting spending by $7,500 a year.Case study
Seen in the real world.
The Tilden Family Bakery is a fictional business used here purely as an illustrative example. After a rent increase, the owners kept drawing $7,000 a month from the business while it generated only $5,200 a month of operating cash, producing dissaving of $1,800 a month, or $21,600 a year.
For the first eleven months the shortfall came out of a $26,000 reserve built during a strong period, and because the profit and loss account still showed a small profit, nobody flagged it. The reserve was almost exhausted before the bookkeeper pointed out that the cash balance had fallen every single month for a year.
The owners cut their drawings to $5,000 a month and raised prices by 7%, turning the monthly gap from -$1,800 into a small positive figure. In this illustrative telling, the important detail is that the accounts looked profitable throughout; only the cash trend showed the dissaving.
Watch out
Common mistakes.
- Treating dissaving as always irrational, when drawing down savings in retirement or between seasons is exactly what those savings exist for.
- Watching profit instead of cash, since a business can report a profit while steadily dissaving through drawings, tax payments and capital spending.
- Reading a national savings rate as if every household behaves the same, when averages hide very different positions across income groups.
Questions
People also ask.
Is dissaving the same as being in debt?
No, dissaving describes a flow over a period, whereas debt is a stock, and it is possible to dissave for years while still holding net assets.
How is dissaving measured for a business?
By comparing cash generated from operations with cash consumed, so a negative net movement in cash reserves before financing is the practical equivalent.
Can a whole country dissave?
Yes, when national consumption and investment exceed national income the shortfall is met by borrowing from abroad, which shows up as a current account deficit.
From the founder's library
Take it further with the book.
Build your financial confidence beyond this definition. Shihan's full-length guide, Accounting Fundamentals, takes the same plain-English approach and turns it into a complete, practical playbook for non-finance managers, business owners and students - with chapter-end quiz answers and presentation slides included.
25% off with code MMHQ25, applied at checkout. Priced in USD - checkout may show the equivalent in your local currency.
View the book and save 25%Related