Bev Budsworth from The Debt Advisor was asked to comment on 5 Live (Sunday 29 December 2013) on the latest report from Aviva on family finances. Following a survey of 2,000 families Aviva report the following:-
- The average family’s income has risen by 12% since January 2011
- Despite the increase there is now a wider income gap between the families who are financially well off and those with low incomes
- 30% of families have savings of less than £500 in the bank
- The cost of living is uppermost in people’s minds
The view that incomes have risen is not shared by all. According to the Resolution Foundation, a leading think tank tasked with improving living standards for the 15 million people in Britain on low and medium incomes, they consider that peoples’ incomes have in real terms declined in the past couple of years.
Considering that private consumption accounts for a whopping 66% of GDP, it is important to understand how consumers play their part in making sure that the economy does continue to recover. First however, it is vital to understand the connection between:-
- Income Growth
- Consumption Growth
- Savings
PRE 2008
In the period prior to the recession in 2008 consumption growth outstripped income growth and led to a steady fall in savings.
IMMEDIATELY POST 2008
Consumers understandably stopped spending and the saving ratio rose correspondingly.
NOW
The saving ratio has been steadily falling as consumption has grown more quickly than household incomes.
THE RESOLUTION FOUNDATION ASSERT – THERE IS A RULE OF THUMB THAT FOR EVERY EXTRA £1 OF HOUSEHOLD INCOME EARNED, 60P IS SPENT. IN CASH TERMS (PRESUMABLY AFTER TAKING INTO ACCOUNT TAX AND VAT) THIS UNSURPRISINGLY WORKS OUT AT 1 FOR 1. SO IF CONSUMERS ARE TO CONTINUE TO SPEND IN LINE WITH PREDICTIONS FROM THE OFFICE FOR BUDGET RESPONSIBILITY OF 2% GROWTH IN 2014, THEY NEED TO SEE A 3.3% INCREASE IN HOUSEHOLD INCOME.
Bev Budsworth adds “Considering many employers have themselves suffered reduced incomes and have had to implement wage freezes, it is hard to see how they will fund increases of 3.3% or above”.
Forecasters predict that household incomes will only increase by 1.4% meaning that consumers will continue to use their savings. Mixed into the pot is that the significant looming problem that millions of households will be exposed to growing debt repayment burdens when interest rates rise.
This is from the latest report from The Resolution Foundation, “ We estimate that, if rates increase to 5 per cent by 2018 – an adverse though plausible possibility – and household income growth is slow and uneven in the recovery, the number of households spending more than one-half of their disposable income on repaying debt (a position we term ‘debt peril’) could rise from 600,000 today to around 2 million. Even if rates rise much more slowly and incomes outperform current projections, the number in ‘debt peril’ would still rise.”
The above report is a timely warning that we need to pay much more attention to our household budgets and seriously way up how we spend our money. We have got used to low interest rates and having more disposable income for spending.
Bev Budsworth adds “At the top of our New Year resolutions needs to be a serious exercise at conserving cash and if possible building up savings. The steps we need to take are logical but do require attention and include:-
- Review income and expenditure to identify and eliminate waste
- Pay off expensive debts first
- Shop around to reduce utility bills
- Monitor weekly shopping – make a list and try to cut out waste
- Start saving a set sum each month. It’s best to set this up as a standing order which goes out on pay day. What’s good about saving is that you earn interest on your interest. There is also a massive feel good factor to seeing your savings grow.
- Open a cash ISA – you can inject £5,760 each year into an ISA without suffering tax on interest.
Finally, the team at The Debt Advisor wish all readers a very Happy New Year. We hope you make 2014 a year where your finances get fitter.