Influences on households' spending, saving and borrowing: age

Published by Patrick Mutisya · 14 days ago

IGCSE Economics 0455 – Households: Influence of Age on Spending, Saving and Borrowing

Microeconomic Decision‑makers: Households

Objective

Understand how a household’s age influences its decisions to spend, save and borrow.

Why Age Matters

Age determines the stage of life a household is in, which in turn affects income sources, financial responsibilities and future expectations. These factors shape the household’s:

  • Consumption patterns

  • Saving motives

  • Borrowing behaviour

Typical Age Groups and Their Economic Behaviour

Age GroupTypical Life StageKey Income SourcesSpending PrioritiesSaving MotivesBorrowing Tendencies
0‑17 yearsDependents (children, students)Allowance, part‑time jobs (rare)Education, leisure, clothingVery limited; mainly for future educationUsually none; may be covered by parents
18‑24 yearsStudents / early career entrantsPart‑time work, parental support, scholarshipsEducation, technology, social activitiesShort‑term savings for emergencies, travelStudent loans, credit cards, small personal loans
25‑34 yearsYoung adults, early family formationFull‑time employment, dual‑income householdsHousing (rent/mortgage), childcare, transportHome deposit, retirement start, emergency fundMortgage, car finance, personal loans for major purchases
35‑49 yearsMid‑career, family consolidationHigher earnings, possible bonusesMortgage repayments, education of children, healthRetirement savings, children’s education fund, investmentMortgage refinancing, equity release, business loans
50‑64 yearsPre‑retirement, “peak‑earning” phasePeak salaries, pension contributionsTravel, health care, downsizing homeAccelerated retirement savings, wealth preservationMortgage payoff, limited borrowing, reverse mortgage options
65+ yearsRetirementPensions, state benefits, investment incomeHealth care, leisure, supporting grandchildrenPreserve capital, fund long‑term careRare; may use equity release or small credit lines for emergencies

Economic Theory Behind Age‑Related Behaviour

The consumption function can be expressed as:

\$C = a + bY\$

where:

  • \$C\$ = total consumption

  • \$a\$ = autonomous consumption (spending that occurs even when income is zero, often higher for younger households due to parental support)

  • \$b\$ = marginal propensity to consume (MPC)

  • \$Y\$ = disposable income

Age influences both \$a\$ and \$b\$:

  1. Younger households have a higher \$a\$ relative to income because they rely on allowances or parental support.

  2. Middle‑aged households typically have a higher \$b\$ as they allocate a larger share of each additional pound to mortgage repayments, child‑related expenses and savings.

  3. Older households may have a lower \$b\$ because a larger proportion of income is already earmarked for fixed costs (pensions, health care) and they focus on preserving wealth.

Key Influences by Age

  • Life‑cycle hypothesis: Households plan consumption and saving to smooth income over their lifetime.

  • Human capital investment: Younger people invest in education, which reduces current consumption but raises future income.

  • Housing stage: Buying a home (often 25‑34) spikes borrowing; later stages may involve mortgage repayment or downsizing.

  • Retirement planning: As age increases, the focus shifts from accumulation to decumulation of savings.

Implications for Policy Makers

Understanding age‑related financial behaviour helps governments design targeted policies:

  • Student loan schemes for 18‑24 age group.

  • First‑time buyer incentives for 25‑34 households.

  • Tax‑advantaged pension relief for 35‑64 age groups.

  • Support for elderly care financing for 65+.

Suggested diagram: Life‑cycle model showing typical consumption, saving and borrowing patterns across different age groups.