Majority of households struggling to save

MORE than half of households are cash-strapped at the end of the typical month despite the higher pace of savings in recent years.

By InvestSMART · 1 Oct 2012

By InvestSMART ·
1 Oct 2012

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MORE than half of households are cash-strapped at the end of the typical month despite the higher pace of savings in recent years.

The share of households saying their financial situation had improved rose slightly in 2012, but those who could not make ends meet were spending more over their income levels, according to the ME Bank Household Financial Comfort report.

"What's interesting is that the savings rate has gone up but the majority of Australians are struggling to save each month," said Jeff Oughton, chief economist at Melbourne consultancy Economics and Beyond, which helped prepare the report.

The household savings ratio was 9.3 in the year to June 2012, representing 9.3? saved for every dollar of disposable income. The savings rate has hovered around 9.5 since 2008-09 when the financial crisis hit, making consumers more wary of spending. Before that, the ratio was 3.7 in the year to June 2008, according to the Bureau of Statistics.

Households unable to save but able to make ends meet comprised 43 per cent of the 1500 homes the survey conducted in June 2012. A full 10 per cent of households were going backwards in their finances, drawing on savings, loans, credit or equity in their home. A minority, 47 per cent, were managing to save, the report showed.

Of those spending more than they earned, the amount spent over income rose from an average of $541 per month in October 2011, when the survey was last conducted, to $655 per month in June 2012.

"There are a lot of people under financial stress who don't have a mortgage and don't own a home," said Mr Oughton, who said the home owners ahead in their mortgages, referred to by the Reserve Bank, should not be confused with the overall financial wellbeing of households.

"The RBA looks at it, if you like, from a bank shareholder perspective," he said. "How about we look at it from a 'national interest' perspective, where a lot of people are under stress because they don't have homes, they don't have high levels of cash buffer and are worried about their superannuation savings too."

The improvement in financial comfort was attributable to a boost in confidence from lower income households through government handouts, Mr Oughton said.

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Frequently Asked Questions about this Article…

What did the ME Bank Household Financial Comfort report find about how many households are cash‑strapped?

The report found that more than half of households are cash‑strapped at the end of a typical month. In a June 2012 survey of 1,500 homes, 43% said they can make ends meet but cannot save, 10% were going backwards (using savings, loans, credit or home equity), and 47% were managing to save.

What is the household savings ratio and how did it change up to June 2012?

The household savings ratio was 9.3 in the year to June 2012, meaning households saved about 9.3% of disposable income. The rate has hovered around 9.5% since 2008–09 after the financial crisis, compared with a much lower 3.7% in the year to June 2008, according to the Bureau of Statistics.

If the national savings rate has gone up, why are many Australians still struggling to save each month?

Jeff Oughton, the report’s co‑author, noted the apparent paradox: while the aggregate savings rate rose after the financial crisis, the majority of Australians still struggle to save month to month. The report shows many households have little cash buffer, some are spending more than they earn, and improvements in reported comfort were partly driven by lower‑income households receiving government handouts.

How many households were spending more than they earned and how much was the shortfall?

About 10% of households surveyed were going backwards financially — drawing on savings, loans, credit or home equity. For those spending more than their income, the average monthly shortfall rose from $541 in October 2011 to $655 in June 2012.

Does home ownership mean households are financially comfortable?

Not necessarily. The report highlights that many people under financial stress do not own homes or have mortgages, but Oughton warned that homeowners who are ahead on mortgages (a point the RBA notes) should not be taken as representative of overall household wellbeing.

What perspective did the report say the Reserve Bank (RBA) often takes on household finances?

According to Jeff Oughton in the report, the RBA tends to view household finances from a bank‑shareholder perspective (for example, focusing on mortgage servicing). Oughton suggested looking instead from a 'national interest' perspective, noting many people lack homes, low cash buffers and have concerns about superannuation savings.

Did government payments affect household financial comfort in the report?

Yes. The report attributed part of the improvement in financial comfort to a boost in confidence among lower‑income households resulting from government handouts.

What are the key takeaways for everyday investors from the Household Financial Comfort report?

The report shows a mixed picture: the national savings ratio has risen since the financial crisis, but many households remain cash‑strapped or are drawing on savings and credit. For everyday investors, the report highlights the importance of cash buffers and concern about superannuation and overall financial resilience across different household types.