Chapter 3

Household Expenditure

Learning Intentions Upon completion of this chapter you should be able to: Illustrate the difference between fixed, irregular and discretionary spending. Understand the importance of prioritising expenditure. Illustrate the difference between current and capital expenditure, Explain the terms ‘impulse buying’ and ‘false economy’. Prepare a household expenditure plan.

Types of Expenditure Expenditure refers to the way people choose to spend their income in order to satisfy various needs and wants. Fixed Expenditure involves the same amount of money being spent on a regular basis and is not dependent upon usage. Examples of fixed expenditure include: mortgage repayments, rent, car tax, tv licence and insurance premiums. Irregular Expenditure takes place on a less regular basis and the amounts involved also tend to vary with usage. Since it is less predictable it is more difficult to plan for irregular spending. Examples of irregular expenditure include: groceries, clothing, fuel, light and heat, telephone bills, education costs and repairs. Discretionary Expenditure: Non-essential items which we choose to buy. Spending of this type tries to satisfy our wants rather than our needs. Examples of discretionary expenditure include: entertainment, holidays, gifts and upgrades to expensive items such as cars, furniture and household electronics.

Current Expenditure vs. Capital Expenditure Current Expenditure takes place on a continuous basis, week after week and month after month. Examples include spending on groceries, utilities (gas, electricity etc.), rent, education and travel. Capital Expenditure is long term or once-off spending. For example a household may purchase a new dishwasher for their home. This is not something they will buy every week and the dishwasher is expected to last for several years. Other examples of capital expenditure include the purchase of a new car, furniture, a laptop or TV. Activity If the household bought dishwasher tablets, which type of expenditure would be involved? Explain your answer.

Effective Spending The following is a set of guidelines for effective spending and should help you to get the most out of your money: Prioritise Expenditure: Buy essentials first Avoid Impulse buying: No ‘spur of the moment’ purchases Beware of False Economies: Is this really good value? Consider Opportunity Cost: Look at the alternatives Check Bills/Invoices: Are they correct? When are they due?

Prioritise Expenditure Needs should get priority over wants. Decide what are the most important and most urgent needs. Look also at the timing of the expenditure and consider the impact on cash flow. For example, there may be some months when the household has several large expenses to pay and this will put a huge strain on the available funding, e.g. Christmas, back-to-school expenses etc. It may be necessary to save or borrow money to deal with these expenses.

Avoid Impulse Buying Impulse Buying is the buying of goods without planning to do so in advance, as a result of a sudden whim or impulse. The problem with buying ‘on the spur of the moment’ is that we may buy things which are not necessary and may even turn out to be wasteful or just poor value for money. Impulse buying, especially on large items like furniture and electrical goods, can also mean that we may not have enough money available for more essential or urgent spending. To help avoid impulse buying: make a shopping list and stick to it!

Beware of False Economies A False Economy describes a purchase which appears to be good value for money but in the longer term turns out to be more expensive. Examples of false economies include: A decision to postpone a routine car service may result in major engine faults some time later. The cost of fixing these major faults is likely to be far greater than the routine service. A decision to stop paying for house insurance, may save a household a few hundred euro a year, but may cost tens of thousands in the event of a fire or burglary. Buying a family size pack of cereal, because it’s cheaper per gram than a smaller pack, but throwing most of it out unused.

Consider Opportunity Cost Remember that every item has two costs associated to it: a financial cost and also an opportunity cost. Before making a decision to spend money, households should consider what alternative uses they might have for the money. This is especially true when spending on wants rather than needs. It helps ensure that money is spent on those items which are most beneficial and which represent good value for money.

Check Bills and Invoices Get into the habit of checking all bills and invoices which you receive. An invoice is a type of bill received whenever goods or services are bought, usually on credit. (‘Buying on credit’ means ‘buy now, pay later’). For example, households use electricity and receive a bill (or invoice) requesting payment for the units of electricity consumed during the previous 2 months. Check bills to make sure they are accurate. Check bills to give you a better understanding of how and why you are being charged. This may help you to look at ways of cutting back on unnecessary or excessive expenditure.

Recording and Planning Expenditure The recording of both income and expenditure takes place in an Analysed Cash Book (see Chapter 6). These income and expenditure records should help the household to plan future spending and Household Budgets (see Chapter 5).

Expenditure Plan Please turn to page 25 of your Time for Business text books and look at the Wilson Household Expenditure Plan

Solutions to Overspending Cut Back On Spending: This is an obvious solution and applies particularly to irregular and discretionary expenditure. Spread Large Payments Out Over Longer Time Periods: This will reduce the weekly/monthly payments. Postpone Or Delay Non-essential Spending: Buy the essentials first. Use Savings From Previous Month(s): Use surplus money to match the planned overspend. Generate Extra Income: Extra income should allow for extra spending. Live within your means! Borrow Money: The last resort. This is a short term and expensive solution which will have to be repaid with interest.

Recap and Review Can you do the following? Illustrate the difference between fixed, irregular and discretionary spending. Understand the importance of prioritising expenditure. Illustrate the difference between current and capital expenditure. Explain the terms ‘impulse buying’ and ‘false economy’. Prepare a household expenditure plan.