Disposable income uncertainty
How is your disposable income looking this year?
The gap between what we earn and what we spend is, in many cases, closing due to rising price inflation and stagnant wage growth.
According to some new research, around a third of UK households have delayed making ‘big ticket’ purchases in the last year, due to this squeeze on household incomes.
The finding is part of the latest Disposable Income Index, published by Scottish Friendly and the Social Market Foundation.
They found that as the cost of living continues to rise many households are reigning in their spending on expensive items, such as TVs, cars and home improvements.
The majority of people deferring major purchases say this is due to unaffordability while others cite uncertainty over prices as the main factor.
Most respondents to the research say they don’t have enough money to cover the cost of major purchases.
However, one in five cited uncertainty over prices as the main factor for postponing a big purchase.
The quarterly report, compiled in conjunction with leading think-tank the Social Market Foundation, shows that the median UK household has £1,078 left each month after paying for absolute essentials of housing, energy, water and a broader basket of goods including groceries, transport, childcare and broadband internet.
These goods are required to play a full role in modern society. Money left at the end of the month is available for other key items like clothing, furniture and savings as well as luxuries like holidays.
Inflation outpacing wage rises for the second quarter in a row is putting additional pressure on households’ disposable income as the latest figures from the ONS show.
More than four in ten people say they are worse off than 12 months ago as the cost of living rises.
Meanwhile, eight in ten households say their financial situation isn’t improving and just over a third believe they will be better off in 12 months’ time.
As a result, the pay squeeze on household finances has hindered the growth in domestic consumption in the last quarter which has been the principal driver of economic growth in recent years.
In the period between April and June 2017, household spending increased by just 0.1%, which is half the rate for the first quarter.
Meanwhile the Society of Motor Manufacturers and Traders (SMMT) is forecasting a decline in new car registrations in 2017 and into 2018.
The index also reveals it is younger people who are most worried about their debt and their ability to cope with an unexpected bill.
Over half of millennials (those born between 1981 and 1998) are anxious about debt, while 70% of those aged between 25-34 are concerned about their ability to cover a big unplanned expenditure.
Overall nearly four in ten British households are anxious about the amount of money they owe.
The index also reveals a significant difference between the spending habits of millennials compared to older generations.
39% per cent of millennials have delayed the purchase of a big-ticket item in the last 12 months compared to just 29% of Baby Boomers.
Calum Bennie, savings expert at Scottish Friendly, says:
“We seem to be stuck in a rut of economic uncertainty. The country is anticipating the outcome of Brexit negotiations and the impact this will have on the wider UK economy.
“Employment levels are continuing to rise. However, this is tempered by the reality that stagnation in wages coupled with creeping inflation is leaving many households needing to do more with less money in real terms.
“As a result, anxiety about finances and debt levels looks to be on the increase and sadly it’s younger people who are feeling the pinch more than most.”
This is really interesting research and raises some important issues.
Financial Planning is a great way to help with purchasing decisions. By constructing lifetime cash flow forecasts for our clients, we are able to give them the confidence to spend money, without risking running out of money in later life.
This lifetime cash flow forecasting is also a great way to reduce financial anxiety, demonstrating that you have enough to meet your lifetime goals.
With rising price inflation and the prospect of higher interest rates, we expect the cost of living squeeze to continue for some time.
Some of the recent economic indicators we review point towards a tougher few years ahead for the British economy, with the uncertainty of Brexit negotiations contributing to these challenges.
Households need to take proactive steps now to ensure they can afford to meet their goals and avoid the financial anxiety that inevitably accompanies periods of economic uncertainty.Brits putting off any big ticket purchases due to disposable income uncertainty Click To Tweet