Essential Personal Finance Chapter 5 The pillars of wealth: budgeting and saving © 2017 Lien Luu, Jonquil Lowe, Jason Butler and Tony Byrne

Contents Introduction Living within your means Budgeting Debt and saving in the UK Good debt – bad debt Types of borrowing Credit referencing and scoring Budgeting Check your income Control your expenses Importance of saving Compound interest Conclusions © 2017 Lien Luu, Jonquil Lowe, Jason Butler and Tony Byrne

Introduction: pillars of wealth Wealth accumulation Budgeting Saving Investing © 2017 Lien Luu, Jonquil Lowe, Jason Butler and Tony Byrne

Debt in the UK Figure 5.1 Total debt in the UK (£bn) Source: The Money Charity (2015). © 2017 Lien Luu, Jonquil Lowe, Jason Butler and Tony Byrne

Household gross debt to income Figure 5.2 Household gross debt to income (%) Source: The Institute of Economic Affairs (2015). © 2017 Lien Luu, Jonquil Lowe, Jason Butler and Tony Byrne

UK household finances, 2011-15 Table 5.1 UK household finances, 2011-15 Source: Aviva (2015, 2016), ONS (2015). © 2017 Lien Luu, Jonquil Lowe, Jason Butler and Tony Byrne

Breakdown of monthly expenditure in UK, 2015 Figure 5.4 Breakdown of monthly expenditure in UK, 2015 Source: Aviva (2015). © 2017 Lien Luu, Jonquil Lowe, Jason Butler and Tony Byrne

Expenditure: a global perspective Table 5.2 Breakdown of household expenditure in the UK, USA and China Source: UK (Aviva, 2015), USA (Foster, 2015 (US Bureau of Labour Statistics)), China (China Household Finance Survey, n.d.). © 2017 Lien Luu, Jonquil Lowe, Jason Butler and Tony Byrne

Debt: a global perspective Figure 5.5 Total household debt as per cent of disposable income, 2014 Source: https://data.oecd.org/hha/household-debt.htm. © 2017 Lien Luu, Jonquil Lowe, Jason Butler and Tony Byrne

Costs of borrowings Figure 5.6 Costs of borrowings Source: The Money Charity (2016b). © 2017 Lien Luu, Jonquil Lowe, Jason Butler and Tony Byrne

Credit scoring Table 5.3 Credit scoring: indicative scores Source: www.experian.co.uk/consumer/experian-credit-score.html. © 2017 Lien Luu, Jonquil Lowe, Jason Butler and Tony Byrne

Factors affecting your credit score Table 5.4 Factors affecting your credit score Source: Experian (2016). © 2017 Lien Luu, Jonquil Lowe, Jason Butler and Tony Byrne

Budgeting Fixed costs Variable costs Discretionary costs Rent, mortgage, car payments, childcare Variable costs Food, utilities, petrol, credit card Periodic costs Car insurance, medical, membership Discretionary costs Holidays, gifts, entertainment, eating out © 2017 Lien Luu, Jonquil Lowe, Jason Butler and Tony Byrne

Reasons for saving Emergency Retirement To earn interest Independence Fund a business Provide inheritance Being frugal Deposit for house Future spending © 2017 Lien Luu, Jonquil Lowe, Jason Butler and Tony Byrne

Factors affecting savings Constraints on borrowings Demography Welfare state Income uncertainty Retirement behaviour Changes in wealth © 2017 Lien Luu, Jonquil Lowe, Jason Butler and Tony Byrne

Saving ratio Figure 5.7 Savings as percentage of household income in the UK Source: www.tradingeconomics.com/united-kingdom/personal-savings. © 2017 Lien Luu, Jonquil Lowe, Jason Butler and Tony Byrne

Savings: a global perspective Table 5.5 Household saving as a percentage of disposable income around the world, 2000-15 Source: OECD data (https://data.oecd.org/hha/household-savings.htm#indicator-chart). © 2017 Lien Luu, Jonquil Lowe, Jason Butler and Tony Byrne

Net consumer lending Figure 5.8 Net consumer lending flows in the UK (£bn) Source: Bank of England (2016). © 2017 Lien Luu, Jonquil Lowe, Jason Butler and Tony Byrne

Simple vs compound interest Figure 5.9 Simple and compound interest compared © 2017 Lien Luu, Jonquil Lowe, Jason Butler and Tony Byrne

Monthly vs annual interest Figure 5.10 Effect of saving monthly or yearly compared (assuming 10% p.a. growth) © 2017 Lien Luu, Jonquil Lowe, Jason Butler and Tony Byrne

Importance of saving early Figure 5.11 The importance of starting to save early (nominal amounts for simplicity) © 2017 Lien Luu, Jonquil Lowe, Jason Butler and Tony Byrne

Effects of compound interest on debt Figure 5.12 Effect of compound interest on debt (assuming 10% p.a. interest) © 2017 Lien Luu, Jonquil Lowe, Jason Butler and Tony Byrne

Conclusions Budgeting is the key to avoid over-spending and debts Debts, especially unsecured debts, are expensive Credit score can affect the costs of borrowings Saving acts as a financial buffer Saving early enables you to take advantage of compound interest © 2017 Lien Luu, Jonquil Lowe, Jason Butler and Tony Byrne