Investigating How Much Knowledge the Samples of People Have about Expenditure Behaviour - Essay Example

Personal budgeting: Investigating how much knowledge the samples of people have about expenditure behaviour The economic changes that have been witnessed globally in the recent past have prompted the need for financial planning both at the business organizational levels, as well as at individual and family unit levels. This is because, the international financial crisis that have been witnessed globally over the last three decades have affected the economy in ways that have trickled down to individuals and families, with unemployment, reduced wages and increased inflation being some of the effects of the financial crises(Mcintosh, 2013:83). Consequently, the need to plan for the incomes that individuals earn has become high in the 21st century, more than ever in the history, so that people can manage to survive the hard economic times with the limited incomes they have access to, while also ensuring that they will save some of their earnings for the future needs. The international financial crisis that hit the world between 2008 and 2009 has significantly reduced the disposable incomes for both the individuals and households, considering the fact that the cost of living has increased by a large margin. According to the report released by the U.S. Bureau of Labour Statistics, consumer spending in the USA increased by 3.3% in the year 2011, for the first time since 2008 (Mahapatra, 2013:n.p.). Nevertheless, even with the rise in the consumer spending registered in 2011, the overall consumer spending in the USA economy still remains lower than the levels it was in 2008, which marked the beginning of the slump of the global economy that has taken fairly long to recover. Nevertheless, while recognizing that personal budgeting is an important tool that can enhance the financial prudence of individuals, it is important to realize that there is no right or wrong personal budget, owing to the fact that personal budgeting is a function of individual interests and priorities (Mind UK, 2013:n.p.). Budgeting is a concept that is known to go hand in hand with making money, meaning that there are little chances that individuals will make money without thinking about how the money will be spent (Nafeh, 2013:n.p.). However, while thinking about how the money will be spent is a common phenomenon amongst almost all income earners and households, there is a great difference between thinking on how to utilise the earned money, and complete budgeting of the earnings through specific item by item allocation of expenditure. It is the allocation of expenditure to the specific items within an individual’s areas of spending that determine how well they are able to organise their incomes. Therefore, while statistics have indicated that rarely do the Americans spend money without thinking through the expenditure items, a report on consumer spending released by the U.S. Department of Commerce indicated that for the year 2006, the average savings rate for the American households was -1% (Jacobe, 2013:n.p.). This serves to indicate that; while the Americans think about how to spend their incomes prudently, a majority of them do not put the plan into action by allocating the relevant income to each item of expenditure. This in turn means that they end up violating their well thought-out plan on how to utilise their earnings, by incorporating impulse buying and over-spending on certain items, than it was initially thought out (Mcintosh, 2013:84). Simply put therefore, a majority of the population do not use personal budgeting correctly. The failure to use personal budgets in the right manner always results in frustrations of individuals and households, discouraging them further from future budgeting. Rather, such individuals and households opt to utilise their earnings in a more roughly estimated manner, other than through a system of well formulated financial plan that restricts income expenditure for each single item, to a maximum percentage of the earnings (Community Care UK, 2007:n.p.). People argue that their inability to spend their incomes prudently is due to lack of adequate financial education. However, the truth is that financial education is not so much of a necessity in personal budgeting, considering that personal budgeting has a lot to do with prioritizing the spending of an individual or a household, such that the spending is minimized, while the saving is maximized (Nafeh, 2013:n.p.). Personal budgeting entails creating a list of fixed items on which an individual spends their income on a monthly basis without fluctuating. This leaves the remainder of the incomes to be subjected to the necessary expenditures that might arise on occasional basis, while the savings are streamlined at constant rates monthly, but increased when there are no occasional spending necessary. Gallups annual Economy and Personal Finance survey statistics have indicated that one in every three Americans prepares a detailed household budget for the monthly spending (Jacobe, 2013:n.p.). Further statistics have indicated that 30% of the American households prepare long-term financial plans, which entails the future investment goals (Jacobe, 2013:n.p.). In this respect, the statics indicates that 70% of the American population is not actively involved in the detailed planning of their finances, meaning that their spending of the earned incomes is on the basis of present needs, while ignoring the need for savings and future investment objectives. In the UK, it was found that approximately 45.2% of the households are operating under personal budgets (Community Care UK, 2007:n.p.). This trend spells trouble for the society, considering the fact that; while there lacks prudent management of personal finances through planning and personal budgeting, the whole society is affected negatively. This is because, the society will have a large population that is still needy and unable to support itself at retirement, thus increasing the burden of social support on the already strained system of social welfare support (Mcintosh, 2013:85). According to a study undertaken by the Gallup pollsters, 32% of the American population supported the preparation of detailed and computerized financial plan that has fixed budget item which spend fixed amounts of incomes on a monthly basis (Jacobe, 2013:n.p.). The UK statistics indicate that of the 42.5% of the households using personal budgets, 77% were self-directed in preparing the budgets, while 28% prepared their budgets under the help of others with better experience (Community Care UK, 2007:n.p.). The effect of this kind of budgeting is that such households have been able to streamline their annual spending to a certain percentage of their incomes, effectively affording to save part of their earnings for the future investment objectives. According to this poll, the level of incomes earned, the level of education and independence are two major factors that influences the budgeting habits of the American population. Thus, the individuals who earn more than $75,000 annually, with a college education level and a high independence level from parents or spouses, are best suited to prepare a detailed financial budget, compared to the low income earners and individuals with a lower level of education that is lower than the college level (Jacobe, 2013:n.p.). Similarly, the UK statistics indicated that 75% of the total population involved in personal budgeting were independent (Nafeh, 2013:n.p.). The reliance on the online and computerized financial planning tools was seen to dominate the reliance on financial advisors when it comes to the long-term financial planning by the American population. Thus, 32% of the Americans who makes long-term financial planning, which constituted 30% of the overall American population depends on computerized financial planning programs to prepare their long-term financial plans, while 24% of this population was found to rely on online financial planning programs (Jacobe, 2013:n.p.). This is a notable change from the findings of the Gallups annual Economy and Personal Finance survey that was conducted in 2003, which indicated that 30% of the American population that prepared long-term financial planning depended on certified accountants, while the online program dependence has remained the same as that of 2003, at 24% (Jacobe, 2013:n.p.). Nevertheless, the overall reliance on online financial management programs has grown slightly since 2003, and it could be one of the major factors that has contributed to the increased preparation of personal and household financial budgets in 2013 at 33% of the overall American population, compared to 25% in 2003 (Mahapatra, 2013:n.p.). These statistics serves to indicate that with the financial crises that have hit the international economies, especially the 2008-9 financial crisis, the need for personal financial budgeting has increased, and the people are increasingly engaged in the preparation of the personal and household budgets than they used to do a decade ago. Nevertheless, while there appears to be a growing awareness on the need for personal and household financial planning, the traditional trend of spending more than saving when the income has increased is still being discovered. In the UK, 76% of the population that was involved in personal budgeting indicated that the use of such financial planning had a positive impact especially for savings (Nafeh, 2013:n.p.). There has been a stabilization of the economy that has been registered since 2009, which has seen the American economy start growing at a stable rate annually, thus increasing the incomes available for spending by the population. The average annual income for the Americans is seen to have grown by 1.9% to $63,685 in 2011 from $62,481 in 2010 (Mahapatra, 2013:n.p.). This simply shows that most of the American population is not keen on saving their incomes, considering that when there is an increase in the incomes for individuals and households, there is a corresponding increase in spending, as opposed to saving. This is despite the fact that the inflation rate since 2009 has remained low, thus making the prices of essential goods for the consumers within reach (Mahapatra, 2013:n.p.). This trend points to the lack of personal budgeting preparation, since a personal budget is meant to keep the spending on essentials such as food, utility bills and housing constant every month, meaning that an increased income would definitely result in an increase in the savings since personal budgets seek to minimize the spending and to maximize the savings (Mind UK, 2013:n.p.). The spending on housing is one of the notable areas where a significant decline has been registered, although it has been observed that the major difference in spending between the low and the high income households is in the area of housing (Community Care UK, 2007:n.p.). Housing consumes a huge percentage of the low-income earners incomes, accounting for an average of 56% of the annual incomes of individuals, and 40% of the total budget expenditures for individuals (Mahapatra, 2013:n.p.). For the average income earners, housing also consumes the lion’s share of their total income, accounting for 26% of their total annual incomes, and 34% of the total budget expenditure (Mahapatra, 2013:n.p.). Nevertheless, when expressed in terms of percentages, it can be found that the wealthy households spend less on every item of the household budget expenditure compared to the low-income households, for example spending only 15% of their total annual incomes on housing (Mahapatra, 2013:n.p.). The effect of this is that; the rich households are able to save more of their incomes compared to the poor-households. Thus, while personal budgeting is essential for the overall society, it is much more important for the low-income individuals and households, since it can help in establishing a well streamlined system of fixed spending on essentials and utilities for such individual and households, enabling them to increase their savings for the future (Mcintosh, 2013:86). This is because, the rich households with a minimum of $75,000 annually have been found to be highly involved in budgeting and long-term financial planning than their poor counterparts. References Community Care UK. (January 5, 2007). Direct payments, personal budgets and individual budgets. Accessed from < http://www.communitycare.co.uk/2007/01/05/direct-payments-personal-budgets-and-individual-budgets/#.U2h2ZqDcp9s> Jacobe, D. (June 3, 2013). One in Three Americans Prepare a Detailed Household Budget. Gallups annual Economy and Personal Finance survey. Accessed from Mahapatra, L. (June 01, 2013). Consumer Spending: How Much Of Their Income Do Poor And Rich American Families Spend On Housing, Education, Healthcare, Food And Transportation? International Business Times. Accessed from < http://www.ibtimes.com/consumer-spending-how-much-their-income-do-poor-rich-american-families-spend-housing-education-0> Mcintosh, C. (2013). For Richer, For Poorer. Ebony, 68(10), 83-86. Mind UK. (2013). Personal budgets for social care. Accessed from < http://www.mind.org.uk/information-support/guides-to-support-and-services/personal-budgets/#.U2h2uqDcp9s> Nafeh, B. (October 4, 2013). Managing your personal budget: Disability Rights UK Factsheet F64. Disability Rights UK. Accessed from < http://www.disabilityrightsuk.org/managing-your-personal-budget> Read More