Household spending: cutbacks in 2008
11/04/2008
This year, almost three quarters of households are planning to cut back on their spending, says a survey by financial services provider Axa.
Increases in the cost of food, housing, petrol and utility bills (four important elements in a household`s spending) have left many people`s finances in a poor state, forcing most of the country to think about where they could cut back.
Then there`s the cost of debt. According to Unbiased.co.uk, the last year has seen a massive increase in personal lending, with personal loan levels rising from £2.6 billion to £9.8 billion. The average Briton now needs to devote around 1 day`s wages per week just to pay off the interest costs on their loan and credit card debts - before they put anything towards the actual debt! In other words, they have to get by on just 80% of their salary, which has to cover all their household expenses, as well as the payments towards their debts themselves.
Balancing the household budget
When people don`t have enough money for their debts and their living expenses, they need to balance their household budget by boosting their income, lowering their expenditure, or both.
11% of the people questioned in Axa`s survey said that someone in their household had taken on extra work to boost the household finances. But this isn`t always an option, and rising demands on the household budget can often lead to a vicious circle known as a debt spiral - people borrow more so they can keep up with their basic living expenses without ignoring their credit commitments. Credit cards provide a particularly tempting way for a household to `borrow against` next month`s budget, but borrowing like this is no long-term solution, as interest charges will make each month slightly more expensive than the last.
In many cases, the best way to stretch a household budget is to cut back on spending. No-one likes living without luxuries (whether that means holidays abroad, fashionable clothes or eating out), but sometimes it`s the only way to keep up with the essential expenses without getting further into debt.
Who’s cutting back?
But `belt-tightening` can benefit any household, not just the ones in financial trouble. Even people who can comfortably afford repayments to their debts could seriously improve their long-term finances by cutting back on their household spending and paying off as much of their debt as possible.
Say someone`s paying 18% interest on their credit card debt. If they can put aside just £5 per week to add to their minimum payments for the next 12 months, they’ll reduce their debt by £260 - and save themselves almost £50 in interest charges. In today`s economic climate, with experts predicting tough times ahead, that could make a big difference to next year`s household budget.
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