Use of Individual Income

Three uses of income

After receiving disposable income, a person can use it in three main ways:

• Consumption — spending on goods and services to satisfy daily wants, such as food, transport and bills.
• Savings — the part of income that is not spent and is kept for future use, such as in a bank savings account.
• Investment — using savings to earn a return, such as buying shares, unit trusts or starting a small business.

The household budget

A household budget is a plan that compares a family’s total income with its total spending for a period. There are three situations:

• Surplus — income is more than spending, so there is a balance to save.
• Deficit — spending is more than income, so the family must borrow.
• Balanced — income equals spending.

Factors affecting consumption and savings

The pattern of consumption and savings is shaped by several factors. When income rises, both consumption and savings usually rise too. High prices of goods and higher taxes such as the SST reduce purchasing power. A high interest rate encourages people to save more. A large number of dependants in a family increases consumption spending, while tastes and attitudes towards the future also play a part.

Spending wisely

Wise spending means putting needs before wants, comparing prices before buying, avoiding unnecessary debt, and always saving part of one’s income. These habits help a family keep a balanced or surplus budget.

The importance of savings and investment

Savings and investment bring many benefits to the individual and the nation. Savings provide an emergency fund for unexpected events such as illness or job loss, and act as a source of capital for investment. Wise investment lets money grow and generate extra income in the future. At the national level, high household savings supply funds that banks can lend to businesses, which in turn encourages investment and economic growth.