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Savings

Savings. Factors that Affect Household Saving in the UK. Saving. Saving is “deferred spending” A preference to consume tomorrow rather than today Saving is not investment! But savings flow into the financial system ……… ………and help to provide the funds for investment spending by firms.

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Savings

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  1. Savings Factors that Affect Household Saving in the UK

  2. Saving • Saving is “deferred spending” • A preference to consume tomorrow rather than today • Saving is not investment! • But savings flow into the financial system ……… • ………and help to provide the funds for investment spending by firms

  3. Savings Options Cash Hoarding Bank Accounts Building Societies ISA’s Private Pensions Equities

  4. Introduction • Around 46% of UK households engage in ‘active’ saving (e.g. into a savings account or contributions to a personal pension scheme • Average amount of monthly saving for those households that save is £180; across all households (savers and non-savers), the average is £83

  5. Introduction • The household savings ratio is measured as the percentage of real disposable income that is saved rather than spent

  6. Introduction • The savings ratio is income minus expenditure expressed as a proportion of total income • (S = Yd – C) / Yd • Where Yd = Disposable Income (i.e. income after tax and benefits) • The savings ratio has been quite volatile in recent years

  7. Motivations for Saving • Precautionary saving • Fear of unemployment e.g. during a slowdown or a recession

  8. Motivations for Saving • Building up potential “future” spending power • Finance for major items of spending – such as a new car, tuition fees, school fees or a family wedding • Deposits for mortgages • Saving to pay university tuition charges and school fees!

  9. Motivations for Saving • Incentives to save from higher/rising interest rates • A desire to leave bequests to future generations

  10. UK Household Savings Ratio

  11. Savings and unemployment

  12. Trends in the Savings Ratio (1) • The savings ratio is the percentage of disposable income that is saved rather than spent • Savings provide a financial safety net for households • A fall in the savings ratio means that households are choosing spending today rather than tomorrow • This may be accompanied by a build up of consumer debt which will have to be repaid at some point in the future

  13. Trends in the Savings Ratio (2) • Recent fall in the savings ratio has coincided with a period of high spending by consumers • In the long run households must judge what is an appropriate level of saving to maintain their living standards • The danger of a sustained fall in saving that people are borrowing too much and running into the risk of becoming over-geared (i.e. they have too much debt)

  14. Trends in the Savings Ratio (3) • A fall in house prices, a rise in unemployment or a rise in interest rates might catch out millions of people who have borrowed heavily on their credit cards • If the savings ratio increases sharply, the total level of consumer spending may fall in the short term • This will have a direct effect on demand and incomes in the circular flow for the economy

  15. Income and spending

  16. Borrowing and debt • Borrowing money is effectively dis-saving • This is because it allows people to consume in excess of their current incomes • Borrowing must eventually be repaid • Consumer borrowing has been strong in the UK • The debt mountain for consumers is over £1 trillion

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