Influences on households' spending, saving and borrowing: age

Households – definition and role in the economy

Definition: A household is a group of one or more people who live together and pool their income to make joint decisions about consumption, saving and borrowing. It can be a single‑person household, a couple, a family with children, or any other co‑habiting group.

Economic role (Cambridge syllabus 3.2): Households are the consumers of goods and services, suppliers of labour, and savers/investors who provide the capital that firms use for production.

Objective

To understand how a household’s age influences its decisions to spend, save and borrow, and how age interacts with the other key determinants of household behaviour.

Key influences on household economic decisions (Cambridge syllabus 3.2)

  • Income – the amount of money available after tax (e.g., wages, pensions, benefits).

  • Interest rates – affect the cost of borrowing and the return on saving (e.g., a rise in mortgage rates reduces net disposable income for 35‑49‑year‑olds).

  • Consumer confidence – the degree of optimism households feel about the future state of the economy, often measured by consumer‑confidence surveys. Example: When the Consumer Confidence Index falls, households may postpone big purchases such as a new car or a house.

  • Age – determines life‑stage, income sources, responsibilities and future expectations.

  • Culture – social norms and values that shape attitudes to consumption, saving and debt.

    • In some cultures large families are expected, leading to higher spending on education and housing.

    • In societies where home‑ownership is seen as a status symbol, households may save aggressively for a house even if it means postponing other consumption.

Why age matters

Age indicates the stage of the life‑cycle a household is in, which influences:

  • Sources of income and their stability

  • Financial responsibilities (e.g., education, mortgage, health care)

  • Future expectations (e.g., retirement, inheritance)

Typical age groups and their economic behaviour

Age groupTypical life stageKey income sourcesSpending prioritiesSaving motives (life‑cycle hypothesis)Borrowing behaviour & interest‑rate sensitivity
0‑17 yearsDependents (children, students)Parental allowance, occasional part‑time workEducation, clothing, leisureVery limited; mainly earmarked for future education (precautionary saving by parents)Usually none; any credit is provided by parents – not directly affected by market rates
18‑24 yearsStudents / early‑career entrantsPart‑time jobs, parental support, scholarships, student loansEducation, technology, social activitiesShort‑term emergency fund; start of precautionary saving for post‑graduation lifeStudent loans, credit‑card debt, small personal loans – highly sensitive to interest‑rate changes because margins are thin
25‑34 yearsYoung adults, early family formationFull‑time employment (often dual‑income), government benefitsHousing (rent or mortgage), childcare, transport, household goodsHome‑deposit saving, start of retirement saving, emergency fund – shift from pure consumption to accumulationMortgage, car finance, personal loans for major purchases – borrowing rises sharply; higher rates increase monthly repayments and can delay house buying
35‑49 yearsMid‑career, family consolidationHigher earnings, bonuses, possible investment incomeMortgage repayments, children’s education, health care, leisureRetirement building, children’s education fund, medium‑term investment – saving rate peaks as households smooth income over the life‑cycleMortgage refinancing, equity release, business start‑up loans – borrowers become more interest‑rate conscious because debt levels are larger
50‑64 yearsPre‑retirement, peak‑earning phasePeak salaries, pension contributions, investment returnsTravel, health care, downsizing or home improvementAccelerated retirement saving, wealth preservation, inheritance planning – motive shifts toward decumulation preparationMortgage payoff, limited new borrowing; reverse‑mortgage or home‑equity release may be considered – sensitivity to rates remains but borrowing volume falls
65+ yearsRetirementPensions, state benefits, rental income, investment dividendsHealth care, leisure, supporting grandchildrenPreserve capital, fund long‑term care, generate income – saving becomes “saving‑from‑assets” rather than income‑basedRare new borrowing; equity release or small credit lines for emergencies – decisions are highly rate‑sensitive because income is fixed

Economic theory behind age‑related behaviour

1. Consumption function

The basic consumption function is:

\$C = a + bY\$

  • C = total consumption

  • a = autonomous consumption (spending that occurs even when disposable income is zero)

  • b = marginal propensity to consume (MPC)

  • Y = disposable income

Age influences both a and b:

  1. Younger households have a relatively high a because they receive allowances or parental support that is independent of their own income.

  2. Middle‑aged households tend to have a higher b as each extra pound of income is largely directed to mortgage repayments, child‑related costs and saving for retirement.

  3. Older households often exhibit a lower b because a large share of income is already committed to fixed costs (pensions, health care) and they aim to preserve wealth.

Worked example (exam‑style)

Suppose a 30‑year‑old household has disposable income £20 000 and spends £12 000 on consumption.

Marginal propensity to consume (MPC) = ΔC / ΔY = £12 000 / £20 000 = 0.60.

Thus, for every additional £1 of income, this household would increase consumption by 60 p.

2. Saving identity and the life‑cycle hypothesis

The national‑income identity for a household can be written as:

\$Y = C + S\$

Re‑arranged, saving is:

\$S = Y - C\$

The life‑cycle hypothesis states that households aim to smooth consumption over their lifetime. They save when income is above their expected long‑run average (typically in the 35‑49 age band) and dissaving occurs after retirement.

Saving motives by age (linked to the hypothesis):

  • 0‑24 yr: Precautionary saving for education or emergencies.

  • 25‑34 yr: Accumulation of a home deposit and the start of retirement saving.

  • 35‑49 yr: Building a retirement fund, education fund for children, and medium‑term investment – the peak saving period.

  • 50‑64 yr: Accelerated retirement saving and wealth preservation.

  • 65+ yr: Capital preservation and funding long‑term care; saving becomes “drawing down” rather than accumulation.

3. Borrowing behaviour and interest‑rate sensitivity

  • Types of credit – mortgages, personal loans, credit‑card debt, student loans, equity release.

  • Purpose – housing, education, durable goods, business start‑up, health emergencies.

  • Risk and rate sensitivity – the higher the outstanding debt, the more a change in interest rates affects disposable income. For example, a 1 % rise in mortgage rates can increase a 35‑49‑year‑old’s monthly outgoings by £100‑£150, potentially curbing other consumption.

Implications for policy makers

  • Design student‑loan schemes and interest‑free credit cards for the 18‑24 age group.

  • Offer first‑time‑buyer incentives (e.g., reduced stamp duty, Help‑to‑Buy) for 25‑34‑year‑olds.

  • Provide tax‑relieved pension contributions and “salary‑sacrifice” schemes for 35‑64‑year‑olds.

  • Introduce affordable equity‑release products and targeted health‑care subsidies for the 65+ cohort.

  • Use interest‑rate policy to moderate excessive borrowing in the peak‑mortgage age bands (35‑49).

Suggested diagram: Life‑cycle model showing typical consumption, saving and borrowing patterns across age groups (C rises sharply in youth, peaks in middle age, falls in retirement; S is negative in youth, positive in middle age, negative again after 65; borrowing follows a similar hump‑shaped curve).