Household spending, saving and borrowing
Households are individuals or families who make decisions about how to use their income. They receive income from work, business activity, rent, interest or government support. They then decide how much to spend, how much to save, and whether to borrow.
The three decisions are linked. If a household spends more of its income, it may save less. If it wants to buy something expensive immediately, it may borrow and repay later.
Spending
Money used to buy goods and services now, such as food, clothes, transport or entertainment.
Saving
Income not spent today. It is kept for future needs, emergencies or large purchases.
Borrowing
Using money now that must be repaid in the future, usually with interest.
1. Influences on household spending
Household spending is the amount of money households use to buy goods and services. Spending is important because it creates demand for businesses and affects the wider economy.
- Income: when income rises, households can usually spend more on both necessities and luxuries. When income falls, spending is likely to decrease.
- Interest rates: lower interest rates make borrowing cheaper, so households may spend more on cars, appliances or homes. Higher interest rates can reduce spending because loans become more expensive.
- Confidence levels: if people feel secure about jobs and future income, they are more willing to spend. If they worry about unemployment, they may cut spending.
- Inflation: rising prices reduce the purchasing power of income. Households may spend less because the same amount of money buys fewer goods and services.
- Age: younger households may spend more on education, rent, technology and transport. Older households may spend more on healthcare or may spend less after retirement.
- Size of household: larger households usually spend more because there are more people to feed, clothe and support.
2. Influences on household saving
Household saving is the part of income that is not spent. Saving helps households prepare for emergencies, retirement, education costs or future purchases.
- Age: people may save more during their working years for retirement. Younger people with low income may save less, while older people may use savings after retirement.
- Attitude to saving: some households prefer to save regularly for security, while others prefer to spend more now.
- Consumer and business confidence: if confidence is low, households may save more as a precaution. If businesses are confident and jobs feel secure, households may spend more and save less.
- Interest rates: higher interest rates reward saving because households earn more interest on deposits. Lower interest rates reduce the reward for saving.
- Income levels: high-income households can usually save more because they have money left after buying necessities. Low-income households may find it difficult to save.
3. Influences on household borrowing
Household borrowing means taking loans or using credit to buy goods and services now and repay later. Borrowing can help households buy expensive items, but it also creates debt and future repayments.
- Interest rate: when interest rates are low, borrowing is cheaper and households may borrow more. When interest rates are high, borrowing becomes expensive and may fall.
- Confidence levels: confident households are more willing to borrow because they expect to keep earning income. If they fear job losses, they may avoid borrowing.
- Availability of funds: if banks are willing to lend, households can borrow more easily. If banks make lending rules stricter, borrowing falls.
- Credit cards: credit cards make short-term borrowing easy. This can increase spending, but it can also lead to debt if repayments are not managed carefully.
- Wealth: wealthy households may find it easier to borrow because they may own assets such as houses. Banks see them as less risky borrowers.
How spending, saving and borrowing are connected
| Decision | What usually increases it? | What usually reduces it? |
|---|---|---|
| Spending | Higher income, lower interest rates, high confidence, larger household size | High inflation, high interest rates, low confidence |
| Saving | Higher income, higher interest rates, cautious attitude, low confidence | Low income, low interest rates, strong confidence to spend |
| Borrowing | Low interest rates, high confidence, easy bank lending, credit card access, wealth | High interest rates, low confidence, strict lending rules, low wealth |
Simple way to remember
- More income usually means more spending and more saving.
- Higher interest rates usually encourage saving but discourage borrowing.
- Higher confidence usually encourages spending and borrowing.
- Low confidence usually encourages households to save more and borrow less.
Easy exam method
When answering a question on households, use this structure:
- Identify whether the question is about spending, saving or borrowing.
- Name one influence, such as income, interest rates or confidence.
- Explain the direction: does it increase or decrease spending, saving or borrowing?
- Give a short example.
Example: “A fall in interest rates may increase household borrowing because loans become cheaper. This may increase spending on cars, homes or expensive household goods.”
Quick check
- Households spend money on goods and services.
- Households save money for future use or security.
- Households borrow when they want to spend more than their current income.
- Interest rates affect both saving and borrowing.
- Confidence affects whether households feel safe to spend or borrow.