Households receive income from firms. They also receive money from the government (transfers) and must pay money to the government (taxes). Households spend some of their disposable income and save the rest. In other words,
income + transfers − taxes = consumption + private savings.
There are many different ways of saving, but we do not focus on these differences. We simply imagine that households take their savings to financial markets to purchase interest-bearing assets. Some individual households are net borrowers, but, overall, the household sector saves. There is, on net, a flow of dollars from the household sector to the financial sector of an economy. These dollars are then available for firms to borrow to build new factories, install up-to-date equipment, and so on. That is, they are available for investment. 1
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