FNCE20003 Lecture 2: Consumption and Saving

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Questions and Answers

What is financial wellbeing primarily concerned with?

Financial outcomes, freedom, control, and security over time (correct)

Increasing savings at the expense of all consumption

Reducing expenses to achieve immediate financial goals

Maximizing current consumption regardless of future circumstances

What is a common driver of financial anxiety mentioned in the content?

Inadequate savings for retirement (correct)

High levels of debt

Investing in high-risk stocks

Excessive spending on luxuries

The theory of intertemporal choice emphasizes what key principle?

Consuming the same resources over time to maintain balance

Prioritizing savings over investment opportunities

Maximizing investments can eliminate the need for savings

Increased current consumption leads to decreased future resources (correct)

What problem do most financial weaknesses relate to?

Inadequate savings Signup and view all the answers

Which aspect is NOT included in the definition of financial wellbeing?

Expected returns from investments Signup and view all the answers

What was the household savings ratio in March quarter 2024?

1.1% Signup and view all the answers

What has been identified as a major factor affecting household savings in Australia?

Significantly rising living costs Signup and view all the answers

Which category of saving is most common among individuals aged 25-34?

Saving for a deposit on a home Signup and view all the answers

What is the total value of household deposits currently reported?

$1.46 trillion Signup and view all the answers

How are the majority of savings utilized in the Australian economy?

Deposited with banks and invested indirectly Signup and view all the answers

What has happened to the total value of superannuation assets from the previous year?

It has increased from $3.5 trillion to $3.9 trillion. Signup and view all the answers

What is the primary use of household deposits for large Australian banks?

Funding of loans Signup and view all the answers

Which of the following reasons for saving is least associated with age group 18-24?

Planning for retirement Signup and view all the answers

What is one of the main purposes of budgeting?

To encourage saving Signup and view all the answers

Which life cycle phase typically involves the need for a tight budget?

One-income family with young children Signup and view all the answers

In the context of life cycle phases, what is the focus during the consolidation phase?

Retirement planning Signup and view all the answers

At what age would one typically begin to focus on retirement savings according to life cycle phases?

35 years Signup and view all the answers

Which strategy is emphasized in the life cycle model to address varying needs?

Adjusting savings for individual life stages Signup and view all the answers

What is a common characteristic of the accumulation phase in financial planning?

Growing savings for future consumption Signup and view all the answers

In financial planning, which of the following would be a priority during the spending phase?

Meeting immediate lifestyle needs Signup and view all the answers

What is the objective of estate planning in the gift phase of the life cycle?

To distribute wealth to beneficiaries efficiently Signup and view all the answers

What is a recommended financial strategy for couples in phase (i) before starting a family?

Living on one income and saving the other Signup and view all the answers

Which of the following is a financial issue specifically associated with phase (ii)?

Hospital costs and out-of-pocket medical expenses for having a baby Signup and view all the answers

During phase (iii), which of the following expenses is likely to be a major concern?

Cost of child-care and education Signup and view all the answers

What is a common outcome of financial stress in phases (ii) and (iii)?

Adding personal loans and debt Signup and view all the answers

What demographic shifts might impact financial planning during different phases?

Shifts in family size and preferences Signup and view all the answers

What type of income management should be addressed in phase (i)?

Maintaining a cash reserve for emergencies Signup and view all the answers

In phase (ii), what might couples need to consider regarding employment?

Taking time off work for childrearing Signup and view all the answers

Which of the following is an expenditure to consider during phase (iii)?

Costs associated with a child's living expenses Signup and view all the answers

What is the HELP loan limit for most students as of January 2022?

$121,844 Signup and view all the answers

Which income level requires HELP repayments starting from 1 July 2024?

$54,435 Signup and view all the answers

What adjustment is made to the HECS-HELP loans each year?

They are adjusted by the indexation rate. Signup and view all the answers

What is the maximum repayment rate for HELP at an income level of $159,664?

10% Signup and view all the answers

What happens to outstanding HELP debts in the event of bankruptcy?

They remain outstanding. Signup and view all the answers

What is included in Repayment Income (RI) for HELP repayment calculations?

Taxable income plus total net investment loss Signup and view all the answers

What percentage of HELP payment can be withheld from an employee's remuneration for income levels where repayment is applicable?

1% to 10% Signup and view all the answers

What is true about voluntary repayments of HELP loans?

They can be made at any time on accumulated debt. Signup and view all the answers

Study Notes

Optimising Financial Wellbeing

Financial wellbeing encompasses outcomes, freedom, control, and security regarding finances now and in the future.
Future financial considerations include uncertainty and the potential for adverse circumstances.
Financial anxiety is prevalent, driven largely by retirement funding and family future planning.
Common financial weaknesses relate to insufficient savings.

Consumption and Saving

The theory of intertemporal choice explains the trade-off between current and future consumption.
Rising living costs, including a 52% increase in home mortgage repayments over two years, have contributed to a decline in the household savings ratio, now at 1.1%.

Reasons for Saving by Age

Savings motivations vary by age group, including goals like home deposits, travel, emergencies, wealth accumulation, retirement planning, and income supplementation.

Importance of Savings

Savings serve critical roles for households and the broader economy, with household deposits totaling $1.46 trillion and superannuation assets at approximately $3.9 trillion.
Banks primarily rely on deposits for lending; superannuation significantly invests in public companies and infrastructure.

Life Cycle Model

Financial strategies should adapt to life stages and income variations, focusing on saving and investment based on current needs and resources.
Key life phases include:
- Young, single individuals or couples with low earning capacity.
- Couples with stable incomes, potentially facing financial stress with the addition of children or expenses.

Phase (i) – Issues for Singles/Newly Married

New job opportunities, travel plans, education costs, debt repayment, and home savings are primary concerns.
A recommended strategy is to live on one income to facilitate savings prior to family expansion.

Phase (ii) – Partnering with Children

Couples face costs including childbirth, hospital bills, and potential government assistance.
Financial planning considers debts incurred from personal loans, credit cards, and mortgages.

Phase (iii) – Raising a Young Family

Considerations include one parent's return to work and associated childcare and education costs.
The HELP loan scheme provides financial assistance for tertiary education costs, with loans repaid based on income levels.

HELP Repayment Levels

As of 1 July 2024, repayments on HELP loans begin at an income threshold of $54,435, scaling between 1% to 10% based on income.
Employers must withhold additional tax from employees for HELP loan repayments.

Other HELP Matters

HELP loans typically do not accrue interest, but are indexed each year for inflation.
Loans must be repaid regardless of bankruptcy status; however, debts are canceled upon death, although they may impact final tax returns.

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Description

Explore key concepts in consumption, saving, and the financial planning life cycle in this informative lecture. Discover strategies to optimize financial wellbeing through better decision-making regarding spending and saving.