What this lesson teaches
I can explain how income, interest rates, confidence, age and culture affect household spending, saving and borrowing.
Syllabus K343, 3.2.1. Influences on households' spending, saving and borrowing: income; rate of interest; confidence; age; culture
Make a guess
Three people in one family earn an income this year: Mei in her first job, her mother at the peak of her career, and her grandfather on a small pension. Who probably puts aside the biggest part of what they earn?
- A 70-year-old retiree with little income.
- A 23-year-old in their first full-time job.
- A 45-year-old at the peak of her career.
Show the answer
A 45-year-old at the peak of her career.
Middle-aged people usually earn the most and save hard for retirement, so they save the largest share.
Confident households spend and borrow more; saving peaks in middle age; culture shapes attitudes to debt.
Confidence: if households feel sure about their jobs and future income, they spend and borrow more. If they fear a recession or job losses, they cut spending and save more as a safety net.
Age: young people often spend most of their income and may borrow, for example for study or a first home. Middle-aged people usually earn the most and save the largest proportion, preparing for retirement. Retired people often spend their savings, so they dissave.
Culture: in some societies saving is highly valued and borrowing is seen as risky. In others, buying on credit is normal. These attitudes affect how much households save and borrow.
Other influences include the size of the family and how easy it is to get loans.
- Confidence
- Higher confidence raises spending and borrowing.
- Age
- Young borrow, middle-aged save most, retired dissave.
- Culture
- Attitudes to saving and debt differ between societies.
Worked example: Saving across a lifetime
Follow one person, Raj, through three stages of life.
- Age 23: Raj has a low starting wage and a study loan, so he saves little.
- Age 45: Raj earns his highest salary and his children are older, so he saves a large share for retirement.
- Age 70: Raj has retired and has little income, so he draws down his savings to live on.
Watch out for this
Old people save the most because they spend the least.
Retired people usually have low incomes and live off their savings, so they tend to dissave. Middle-aged people usually save the largest proportion.
Check your understanding
News reports warn of rising job losses. What are households most likely to do?
- Stop saving, so they can enjoy their money while they have a job
- Save more and spend less, as a safety net
- Borrow more to buy cars before prices rise further
Show the answer
Save more and spend less, as a safety net
Right. Lower confidence makes households cautious.
Check your understanding
Which household is most likely to be borrowing more than it saves?
- A young couple buying their first home
- A couple in their fifties at their highest earnings
- A family in a culture that frowns on debt
- A worker who fears losing her job soon
Show the answer
A young couple buying their first home
Right. Young households often borrow for a home and furniture before their income peaks.