Influences on Household Spending: Income

1. Introduction

Household spending mainly depends on the level of income a person or family earns.

👉 The higher the income, the more a household can usually spend.

2. Sources of Household Income

Households earn income from different sources:

• Wages/Salaries

  • Main source for most people

  • Earned from working (labour)

• Interest (Return on Capital)

  • Earned from savings in banks

• Rent (Return on Land)

  • Earned by leasing property

• Dividends (Return on Enterprise)

  • Income from shares in companies

• Profit (Return on Enterprise)

  • Earned from running a business

3. Disposable Income

Definition

Disposable income is:

Examples of deductions:

• Income tax

• Pension contributions

Importance of Disposable Income

• It determines how much a household can:

  • Spend

  • Save

  • Borrow

👉 It is the most important factor affecting household spending

4. Relationship Between Income and Spending

Positive Relationship

• Higher income → Higher spending

• Lower income → Lower spending

👉 This is called a direct (positive) relationship

Effect on Saving

• Higher income → More savings

• Lower income → Less or no savings

5. Impact of Taxation

Direct Taxes

• Reduce disposable income

Examples:

• Income tax

Effect on Spending

• Higher taxes → Lower disposable income → Less spending

• Lower taxes → Higher disposable income → More spending

6. Income and Spending Patterns

Different income levels lead to different spending habits:

a) Low-Income Households

• Spend a large proportion of income on:

  • Food

  • Basic needs (necessities)

👉 Very little left for saving

b) High-Income Households

• Spend a smaller proportion on necessities

• Spend more on:

  • Luxury goods

  • Savings and investments

👉 Greater financial flexibility