Influences on Household spending, saving and borrowing
Written by Amina Meirkhan | Proofread by Yasmin Uzykanova
Definitions
Disposable income - income that is available to someone over a period of time to spend; including state benefits but excluding direct taxes.
Consumption - amount of goods, services, energy or natural materials used in a particular period of time.
Consumer expenditure - the money spent on consumption.
Interest rates - price paid to lenders for borrowed money. Also benefits paid to people who put savings in a bank.
Inflation - rate at which prices rise over a period of time, or a general and continuous rise in prices.
Consumers consume in order to satisfy their needs and wants and get satisfaction.
Factors affecting consumption:
Disposable income: the more money a household has available, the more goods and services it is likely to consume.
Wealth: again, the more money someone has, the more they are likely to spend.
Consumer confidence: if consumers are confident about their job and income, they might be encouraged to spend more without worries.
Interest rates: if interest rates for borrowing are high, the disposable income of those who have a loan or a mortgage will decrease as they pay more for borrowing. If interest rates provided by the banks on savings are high, consumers might be encouraged to save more in order to earn interest, so they spend less and consumer expenditure falls.
Factors affecting saving:
Future consumption: consumers can save to consume later and make bigger purchases in the future (for example a car or a house).
Disposable income: if a person’s disposable income is high, they are likely to save more because they spend a smaller proportion of their income on necessities.
Interest rates: if the price of borrowing loans or mortgages increases, people will save more to afford a big purchase. If interest rates provided by the banks on savings are high, people might be encouraged to save in order to earn interest.
Consumer confidence: if the consumer is not confident about their job or income, they might want to save more in order to secure their future.
Availability of saving schemes: banks offer a variety of saving schemes and when there are saving schemes that benefit consumers more, they might choose to save rather than spend.
Factors affecting borrowing:
Interest rates: as the price of borrowing increases, people are less encouraged to borrow.
Wealth and income: banks are more likely to loan money to wealthy or high income earning families as they are more likely to repay the loan.
Consumer confidence: how people feel about their financial situation in the future affects their borrowing. For example, if they are worried about inflation in the future, they might borrow now to purchase goods and services now when prices are still low.
Ways of borrowing: the more available options of borrowing, the more people will borrow.
