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

2. 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

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

4. 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

5. 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

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

7. 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

8. 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

9. Debt: a global perspective
Figure 5.5 Total household debt as per cent of disposable income, 2014
Source:
© 2017 Lien Luu, Jonquil Lowe, Jason Butler and Tony Byrne

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

11. Credit scoring Table 5.3 Credit scoring: indicative scores
Source:
© 2017 Lien Luu, Jonquil Lowe, Jason Butler and Tony Byrne

12. 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

13. 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

14. 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

15. 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

16. Saving ratio
Figure 5.7 Savings as percentage of household income in the UK
Source:
© 2017 Lien Luu, Jonquil Lowe, Jason Butler and Tony Byrne

17. Savings: a global perspective
Table 5.5 Household saving as a percentage of disposable income around the world,
Source: OECD data (
© 2017 Lien Luu, Jonquil Lowe, Jason Butler and Tony Byrne

18. 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

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

20. 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

21. 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

22. 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

23. 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