Karthikeyan

1. Household Savings

Meaning of Saving

Saving occurs when a person sets aside part of their current income for future use.

Reasons for Saving

• Future Spending

  • People sacrifice current spending to use money later

  • Examples: holidays, retirement, children’s education

• Earning Interest

  • Saving in banks or financial institutions earns interest

  • Banks also provide security for money

• Precautionary Motive

  • Saving for emergencies

  • Examples: accidents, job loss, unexpected events

Factors Affecting Savings

1. Age

• People usually start saving around age 25

• Stable jobs and fewer debts increase savings

• If government provides pensions/healthcare → people save less

• If not → people save more

2. Attitude to Saving

• Different cultures have different saving habits:

  • High borrowing: USA, UK (credit cards, loans)

  • High saving: Japan, Germany, China (more cautious)

3. Consumer and Business Confidence

• High confidence → more spending, less saving

• Low confidence → more saving, less spending

4. Interest Rates

• High interest rates:

  • Encourage saving (better returns)

  • Reduce spending

• Low interest rates:

  • Discourage saving

  • Encourage spending or investing

5. Income Levels

• Higher income → higher savings

• Lower income → less ability to save

2. Household Borrowing

Meaning of Borrowing

Borrowing is when individuals, firms, or governments take loans and repay them over time with interest.

Reasons for Borrowing

• Buying expensive goods (cars, holidays)

• Funding education

• Purchasing property or land

• Starting a business

• Expanding business operations

Factors Affecting Borrowing

1. Interest Rates

• High interest rates → borrowing decreases

• Low interest rates → borrowing increases

2. Confidence Levels

• High confidence → more borrowing

• Low confidence → less borrowing

3. Availability of Funds

• Controlled by the central bank

• Lower cash reserve ratio → more lending → more borrowing

• Higher cash reserve ratio → less lending → less borrowing

4. Credit Cards

• Allow “buy now, pay later”

• No interest if paid fully each month

• Very high interest if not paid (can be up to 36%)

5. Store Cards

• Used in specific retail stores

• Offer discounts and rewards

• Can lead to overspending and debt

6. Wealth

• Wealthier individuals:

  • Easier to get loans

  • Lower risk for banks

• Less wealthy individuals:

  • Higher risk of default

• Loans often require collateral (security), e.g. house in mortgages