How households use their income
A household is a group of people who share living arrangements and make joint spending decisions. Households earn income, mainly from work, and then choose how to spend, save and borrow. These choices shape demand across the whole economy.
Key idea
Disposable income = income after direct taxes. It is split between spending (consumption) and saving. As income rises, households can save a larger proportion of it.
Spending, saving and borrowing
- Spending rises when income rises, but the proportion spent often falls as people get richer.
- Saving means income not spent. People save for emergencies, future purchases, retirement and to earn interest.
- Borrowing lets households spend more than their current income, for example to buy a car or a home, but it must be repaid with interest.
Example
A young worker with a low income spends nearly all of it. As earnings rise later in life, the same person saves a larger share for retirement.
What influences these decisions
The main influence is the level of income. Other influences include age, the interest rate, confidence about the future, and the availability of credit. A higher interest rate rewards saving and makes borrowing more expensive, so it tends to raise saving and reduce borrowing.
Remember
- Higher income usually means a higher proportion saved.
- Higher interest rates encourage saving and discourage borrowing.
- Age affects patterns: the young and old often save less than middle-aged workers.