MOTIVES FOR SPENDING,

SAVING AND
BORROWING
Unit 21
15.06.2018
 Learning Objectives

 Learners should be able to analyse the different motives for spending, saving and
borrowing.
 Examine the main influences governing individuals’ decisions.
■ How do you decide on spending your income?
 What makes you buy what you buy?
Expenditure

■ People spend their incomes in order to buy goods and services and to maintain a given
standard of living.
 Food, clothing and footwear, housing, gas, electricity, water, consumer durables,
transport, entertainment and leisure goods and services, etc; are the main items
which individuals spend most of their incomes on.
Motives for spending

There are many factors that influence individual’s

expenditure patterns:
1. Disposable income
 The main influence on the amount spent by an
individual or household is disposable income.
o As income rises, individuals tend to spend
more in total.
Other Influencing Factors

2. Wealth: includes a stock of assets such as money held in bank accounts, shares in
companies, government bonds, cars and houses.
 Wealth influences spending mainly in four ways:
o Wealth generates income. E.g.: Dividends from shares, etc.
o Wealth can be cashed in. E.g.: Money earned from selling a car; money withdrawn
from a bank account, etc.
o Households can use their wealth as security for loans.
o Wealth affects confidence. E.g.: If value of people’s housing rises, people will feel
richer and likely to spend more.
3. Confidence: refers to how people feel about their future (in terms of earnings)
 If households feel more optimistic about their future career prospects and income,
they are likely to spend more.
 In contrast, if they become pessimistic about economic prospects they will tend to
spend less.

4. Rate of Interest: “the price of (holding) money”.

o Two likely outcomes:
a. Normally, if rate of interest rises expenditure tends to fall.
 It will make borrowing more expensive
 Encourage saving and
 Reduce the amount spent by people who have borrowed in the past
b. However, in the long run, people who have savings will gain more income and
consequently, they may spend more.
5. The distribution of income
 A more even distribution of income and transfer of income from the rich to the
poor, is likely to increase expenditure in a country.

6. Advances in technology
 It may also increase expenditure, since new products, such as cellphones and
laptop computers, encourage individuals to replace existing products.
 and Reflect

■ What is most likely to cause a rise in expenditure in an economy?

a. A rise in confidence.
b. A rise in income tax.
c. A rise reduction in wealth.
d. A more uneven distribution of income.
Saving

Def.: It is a withdrawal from the circular flow of income.

■ There are a number of forms of saving:

1. Contractual saving
 This means that the individual signs a contract, agreeing to save a certain amount on a
regular basis, such as insurance policies and pensions schemes.

2. Non- contractual saving

 This includes placing money in bank and building society accounts, buying
government securities, shares and property.
o This type of saving varies more with time and
o is heavily influenced by changes in interest rates than contractual saving.
Reasons for saving

■ Individuals save for a variety of reasons.

o Some individuals are, what is known as, target savers.
Def.: individuals who save to gain a particular sum of money for a particular purpose.
E.g.:
Conti…
 Retirement. Savings can make people’s retirement more comfortable.
 For their children’s future. E.g: education, inheritance, etc.
 Savings to cope with emergencies and unexpected problems. E.g.: a job loss, etc.
 To take advantage of any unforeseen opportunities. E.g.: buying a car at a bargain price,
etc.
 To increase current income. That is, the more people save the more interest they tend to
receive not only in total, but also per unit saved.
Influences on Saving

■ Individuals’ savings can be influenced by:

o Income.
 Disposable income is the main influence on savings.
o As disposable income rises, the total amount saved and the proportion saved increases.

o Wealth
 The wealthier people are, the easier they will find it to save.
o Wealthy individuals face less opportunity costs (spend? Or save?)
o The rate of interest
 A rise in the rate of interest, overall, may increase non-contractual saving as it pushes
up the reward for saving.

o The tax treatment of savings

 In a number of countries there are some free schemes where no tax is charged on the
interest earned.

o The range and quality of financial institutions

 The greater the variety of saving opportunities on offer, the more likely people will
find a scheme that will suit them.
 Confidence in the ability of institutions to pay an interest and repay the amount saved,
is also important.
E.g.: Health insurance schemes in Angola.
o Age structure
 The young and the old tend to save less than the middle-aged people. The old,
specially the very old, draw on their savings to ensure a reasonable living standard
during retirement.

o Social Attitudes
 Culture also influences saving patterns.
 The attitude to saving varies between countries.
o In some it is held in higher stem while in others people prefer to spend most of their
income when they receive it.
Borrowing

■ Borrowing moves income from the people who do not want to spend it now to those
who need more money than they currently have.

Why do some individuals borrow? (“Caso kilapi” &“Caso Kichikila”)

o Some individuals who run into financial difficulties borrow to maintain their living
standards.
o Other people borrow in order, for instance, to buy a car or go on a foreign holiday,
or to finance the purchase of a particular good.
Influences on borrowing

o The availability of loans and overdrafts

 The easier it is to borrow, the more likely people are to borrow.

o The rate of interest

 A rise in interest will increase the cost of borrowing, which is likely to reduce
borrowing.
o Confidence
 The more confident people are about the future, the more they will anticipate
earning in the future.
 They may borrow now with an expectation that their future higher income will
enable them to repay their loans.

o Social Attitudes
 Some countries and some groups within countries are more concerned about the
risks of people getting into debt by borrowing than, others.
Exercise
Saving Ratio

Def.:
 It is the proportion of income that is saved.

Calculating and interpreting saving ratio

o Activity 1