Households
The three uses of household income
- Household - one person or a group of people living together who make economic decisions about income and expenditure.
- Spending - using income or borrowed funds to purchase goods and services.
- Saving - income that is not spent now and is kept for future use.
- Borrowing - receiving funds now that must be repaid later, normally with interest.
Households must decide how much income to spend, how much to save, and whether to borrow to bring future spending forward. These decisions are connected: spending usually means less saving, while borrowing raises current spending but creates future repayments (debt).
Influences on spending, saving and borrowing
| Influence | Likely effect | Explanation |
|---|---|---|
| Income | Higher income usually raises spending and saving; low income can increase borrowing. | Basic needs take a large share of low income. As income rises, households can afford more consumption and may have a larger amount left to save. |
| Interest rate | A higher rate tends to encourage saving and discourage borrowing and spending. | Saving earns a larger reward, while loans and existing variable-rate repayments become more expensive. The opposite tends to occur when rates fall. |
| Confidence | Greater confidence tends to raise spending and borrowing and reduce precautionary saving. | People who expect secure jobs and rising income are more willing to make large purchases. Fear of unemployment encourages saving for emergencies. |
| Age | Younger and middle-aged households may borrow more; older households may use accumulated savings. | Income and financial needs change over a lifetime, although individual circumstances vary. |
| Culture | Attitudes to debt, family responsibility and saving alter decisions. | Some cultures strongly encourage saving or family support, while religious or social beliefs may discourage interest-bearing debt. |
This is not a rule: a high interest rate will not make a very low-income household save if income is needed for essentials. Similarly, a confident household may still avoid borrowing because of cultural beliefs or existing debt.
A* analysis chain: State the change -> explain how it changes the reward, cost or confidence involved -> identify the effect on spending, saving or borrowing -> add a condition that may weaken this effect.