A household is a person or family that shares a home and makes money decisions together. Every household must decide how much of its income to spend, how much to save, and whether to borrow.
Spending
Spending (consumption) is using income to buy goods and services such as food, clothing and travel. Poorer households usually spend a larger share of their income because so much of it goes on necessities. Richer households can afford more on luxuries and still have money left over.
Saving
Saving is the part of income not spent. Households save for several reasons:
- Precaution: a safety cushion for emergencies such as a broken boiler.
- Future purchases: putting money aside for a car, a holiday or education.
- Return: money in a savings account may earn interest, or in an Islamic account, a share of profit.
Borrowing
Borrowing means spending money you do not yet have and repaying later. Households borrow to buy costly items such as a home (a mortgage) or a car. Borrowing lets you enjoy something now, but it must be repaid, usually with extra cost, so overborrowing can lead to debt trouble.
What affects these choices
Several factors shift how much a household spends, saves or borrows:
- Income: as income rises, both spending and saving usually rise.
- Interest rates: higher rates reward saving and make borrowing dearer, so people tend to save more and borrow less.
- Confidence: if people feel secure in their jobs, they spend and borrow more freely.
- Age and family: young families often borrow, while older households often save.
Put these steps in order to show how a rise in interest rates changes household behaviour:
- The central bank raises interest rates
- Saving becomes more rewarding and borrowing more expensive
- Households save more and borrow less
- Household spending on goods and services falls