UNIT 3.

4 HOUSEHOLD SPENDING SAVINGS AND BORROWINGS

3.2.1 the influences on spending, saving and borrowing
Activity :
 Identify the periods in a person’s life when they might be: earning less
than they spend; earning more than they spend; not earning but spending
own savings or transfers from others.
 Factors that affect saving for individuals within a particular country
 Explain the factors that affect borrowing for individuals

Objective:
• analyse the different motives for spending, saving and borrowing
• discuss how and why different income groups have different expenditure
patterns (spending, saving and borrowing).

Introduction
Income of a consumer can be saved ,spend and can be enhanced by borrowing
Definition of spending saving and borrowing
Spending /consumption – exchanging money for goods. These goods can be for
immediate consumption /non durable goods and services or they may be
consumer durables.
Savings – setting aside money in order to make purchase at a later date .
Borrowing – getting money from any source which help people to spend more
than their disposable income and involve a cost in the form of interest .
I.SPENDING /CONSUMPTION
Factors affecting spending /consumption /expenditure on goods and service
1.Income
There are different ways of measuring personal income
a.gross personal income – total income from all source
b.disposable personal income- personal income after income tax and other
income related taxes are deducted .
Disposable income = gross personal income – income tax
c.real disposable income = quantity of goods and service disposable income
can buy. Purchasing power of money income
Ex: if income is 100 and person A can buy 5 packets of milk each prices 20 .But
due to inflation price increased to 25 he can buy only 4 packets of milk .this
shows that purchasing power of disposable income falls.
A rise in income tax reduce disposable income and a fall increase disposable
income
The consumption or spending depends on real disposable income

Relation between income and expenditure /spending /consumption

As income rise people save and spend more .As people become rich they tend to
buy better quality products .it is a very interesting fact that as income increase
the proportion they spend might fall .The proportion of income which people
spend is called average propensity to consume. (APC) It is calculated by
dividing consumption by disposable income
Average propensity to consume = consumption
Disposable income

Ex : if the disposable income = 100 and consumption is 200 APC = 200 /100 =2
When income increase to 200 the consumption will be 200 so
APC = 200 /200 =1
This shows that APC will fall as income increase .
Disposable income Consumption APC
100 120
200 200
300 270
400 320
500 350

Other factors affect consumer spending

2.wealth -
3.consumer confidence -
4. interest rate -
5.borrowing -
6.changs in rate of income tax -
7.confidence in career prospects ,there will be increase in spending. But if
country is expecting a recession and expecting a lay off ,then spending will
reduce .
Motive of spending /why do people spend ?
 Satisfy the consumers wants and needs
 Gain utility form goods and services
 Spending on consumer durables can be enjoyed for a longer period and
add to the wealth.so that at the time of inflation they can use income for
non durables

Spending pattern will change over time in individuals .

Why the spending pattern of household changed in developed countries ?
1.real income rise
2.people work few hours than before
3.social attitude change
4.couple marrying late have fewer children
5.people are more health conscious
6.concern for environment
7.technolgy advanced
Consumption pattern and trends
In text page 149,150
Spending patten based on Income :
a.low income group – APC will be high ,basic needs like food ,cloths ,rent etc
b.High income – APC will be low ,spent more money on luxuries .

QUES:.Explain two reasons why the rich spend more in total than the poor. [4]
• greater income (1) means the rich have more purchasing power (1)
• greater wealth/savings (1) which generates income to spend/ e.g. interest,
dividends, capital gains (1)
• greater ability to borrow (1) because banks are more willing to lend to the
rich/the rich have more collateral (1)
• more confidence (1) because the rich may expect that their purchasing power
will continue to be high (1)
Vice versa is acceptable.
1 mark each for each of two reasons identified (×2)
1 mark each for each of two explanations given (×2)
Maximum of 2 marks for a list like approach.

Age
Young people – spend more on luxuries ,party ,clothes etc
Middle aged – more on kids education ,rent ,travel ,save some part of income
Old – more for medical needs ,Dissaving
Gender
Male – and female have different spending pattern .
1.

2.
II. SAVING
There are different types of savings
Forms of savings
Contractual – people sign a contract, agreeing to save a certain amount on a
regular basis e.g. Insurance and pension schemes.
Non – contractual – savings include in form of buying gold, bank deposits,
mutual fund
Reasons for savings
1.Transaction motive to buy goods and services for consumption;
2.precautionary motive Save in the case of a calamity. In countries like
Australia, this is not a major motive for saving, as social security net is quite
generous
3.speculative motive defer consumption to make the money out of savings (and
earn more). For ex save to increase current income -more they save more
interest.
4.Target savers
Save to gain a particular sum of money for particular purpose. for ex people
save for retirement and for children’s future /education or leave them an
inheritance
Factors affecting savings
Savings involve people delay their consumption until some later time when they
withdraw and spend their saving plus any interest .
1.Disposable Income –
As income increase the savings will increase .this can be understood by average
propensity to save .Average propensity to save is the proportion of household
disposable income that is saved .
Average propensity to save (APS) = Savings
Disposable income
INCOME CONSUMPTIO SAVINGS APC APS
N
100 100 0 100 0
200 180 20 90 10
300 240 60 80 20
400 280 120 70 30
500 300 200 60 40

2.Wealth -
3.Tax treatment on savings
5.Age
6.Social attitude
7.Consumption
People often save money in order to make bigger purchases later on, eg. the
purchase of a new car, for a deposit on a house. They may also save money to
spend on goods when they get older and only have a pension to live on. Many
people save in pension schemes.
8.Interest Rates
Interest rate is the return to saving or the opportunity cost of consuming what
could have been saved instead. The higher rate of interest the more return a
person could earn by saving their income, or more they will forgo if they spend
it on goods and services.
9.Consumer confidence
How confident people feel about their financial situation now and in future can
affect consumption and savings behavior. Many people can save as a precaution
in case their circumstances change
If people think they could be made unemployed in the future then they may start
saving more so they can draw on their savings if they loose their job.

10.Availability of saving schemes

Banks and financial institutions now offer a wide variety of savings schemes
with different terms and conditions to suit different people. The more a person
saves and the longer they are willing to serve without withdrawing money m the
higher rate of interest they can normally get.

Difference in saving pattern based on income

High income - Savings tend to be more .APS will be more. Save and invest a lot
of their income in shares, bonds and debenture since they have a high risk
taking ability.

Middle income - Ability to save is less compared to high income class

Since risk taking ability of this group is lesser than the high income group they
invest in low risk financial instruments like mutual funds, fixed deposits etc.
People in this group mainly save for assets that promote long-term well-being
and financial self-sufficiency such as homeownership, higher education

Low income - There is no formal and organized saving trend for people in this
group.
They have limited savings and most often it ends up in dissaving’s
Dissaving means that spending more than the income This is because they are
either drawing on their past savings or more likely borrowing others savings .
AGE –
Young –
Middle aged –
Aged -

III.BORROWING
Borrowing mostly moves income from people who do not want to spend it now
and those who need more money than they currently have. This will be possible
through different methods .But the most common form is a bank loan make it
possible for household to spend more than what they have .But there is a cost of
borrowing and that is the interest.
Motives of borrowing
1.mortgages
This is the loan taken by household to buy an apartment or a house. But this is
an asset and add to someone’s wealth.it can be considered as a form of savings
2.buy shares
Some people borrow to buy shares which they get a dividend and appreciation
in the value of shares.
3.start and expand a business
Some people borrow to start or expand their business and will repay loans
form future profit .self employed workers also borrow to buy tools and
equipment.
4.to finance a training or education course
This will improve their qualification so that they get a better paid job.
Personal debt – the total stock of accumulated borrowing by a person or
household is called personal debt .
Factors affecting the rate of borrowing
1.change in rate of interest
Interest rate is the cost of borrowing money. A reduction in interest rate cause
an increase in borrowing. Larger the amount a person borrow longer loan take
to repay.
2.consumer confidence
3.wealth
4.ways of borrowing and availability of credit
5.social attitude -
In some countries they don’t want to set the people into debt .so will not
encourage much borrowing .
How and why different income groups have different expenditure patterns
(spending, saving and borrowing).
Past Papers
Paper 21, June 2010
What might determine why one person saves a higher proportion of income and
spends a lower proportion than another person? (6 marks)
Paper 22, November 2010
Discuss why some individuals spend less than their income whilst others spend
more. (7 marks)
Paper 23, November 2010
Discuss whether high income earners will always save more than low income
earners. (8 marks)
Income and expenditure pattern
Basis of their income
High Income Class(Rich)
Spending
Not likely to spend all of their income as their disposable income is really high.
Spend lower proportion of their disposable income /use less % for consumption.
The pattern of expenditure of this group is characterized by a huge amount of
money spent on luxury items and leisure activities .
Allocate a lot of resources in high end consumer goods such as cars, latest
electronic gadgets, and houses.
Though spending increase with increase in income proportion of income spend
tend to be less
When income increase APC will decline .difference in spending will depends
on country by country also .
Savings
Savings tend to be more .APS will be more when income increase . These
groups predominantly save and invest a lot of their income in shares, bonds and
debenture since they have a high risk taking ability.
Borrowing
Rich people - Need for borrowing is very less
The financial needs in terms of borrowing are mainly from private banks.
They are in a better position to secure loans as they have enough security to
provide to financial institutions .more wealth easier and confident to borrow.
Middle Income Class.
Spending and Borrowing
The bulk of their expenditure is spent on buying consumer goods. The middle
income group resort to the public sector banks for their financial needs.

Savings
Ability to save is less compared to high income class
Since risk taking ability of this group is lesser than the high income group they
invest in low risk financial instruments like mutual funds, fixed deposits etc.

People in this group mainly save for assets that promote long-term well-being
and financial self-sufficiency such as homeownership, higher education

Low Income Class (Poor)

Spending
will spend of all their income and yet may be not sufficient
The low income class spent primarily on food products.
Their income is too low for them to afford luxury goods and consumer foods.
Savings
There is no formal and organized saving trend for people in this group.
They have limited savings and most often it ends up in dissaving’s
Dissaving means that spending more than the income This is because they are
either drawing on their past savings or more likely borrowing others savings .
Borrowing
illiterate mainly depends on local money lenders for their financial needs.
They are likely to experience greater difficulty in borrowing because they have
less security to offer
Difference in spending saving and borrowing based on age
Young Middle aged Old
house hold

Spending Cloth and Without children Heating ,transpor

entertainment – eating and t ,health
recreation
With children –
education ,health
etc
Saving Less savings Save more Save less due to
financial
hardship and low
income from
pension

Borrowing Not very high High High