How Income and Life Stages Shape What We Buy

Compared to high income households, lower income households typically face more financial difficulties as a result of the constant rise in living expenses. For the average household, this requires putting limited resources to the best possible use by making often tough decisions about what and how much to consume, produce, trade and invest.

The 2024 FNB Retirement Insights Survey provided some useful insights into the spending choices that pre-retirees and retirees are making to help them navigate their cost-of-living pressures, and the economic and social concepts related to these pressures and choices.

Regardless of life stage, everyday essentials disproportionately burden low-income earners

Engel’s Law, a cornerstone of consumer economics, explains this concept. As income rises, the proportion of our total budget that we need to allocate to essential items like food, housing, and transportation shrinks. This frees up more income for discretionary spending on entertainment, dining out, or travel. Survey results show that this is common across life stages, but that low-income earners have less of this discretionary income, often to the detriment of their retirement savings needs.

Our financial priorities evolve with our income levels

Maslow’s Hierarchy of Needs helps us understand this. Once we meet our basic needs, we strive to fulfill higher-level needs and wants. The survey results show that low-income earners prioritise daily expenses to look after families, while those with higher incomes focus on retirement planning or investments.

The high cost of living is felt by all, but disproportionately by lower income earners

Behavioural economics explores how people with limited income may resort to impulse purchases or rely on credit for everyday essentials, potentially leading to a vicious cycle of debt. The 2024 FNB Retirement Insights Survey results bear this out, suggesting that lower-income earners allocate a large portion of their budget to debt service costs, leaving less than optimal amounts for retirement savings. For financial institutions, this serves as a motivation to continue educating customers about finances and the importance of keeping debt levels manageable.

Understanding how income shapes spending habits is crucial for both consumers and financial services providers. It allows consumers to make informed financial decisions and banks and financial services providers to structure their products and services to better suit specific income groups. As inflation continues to decline, there is the potential for lower interest rates by this time next year, which will ease some financial pressures on consumers. It’s an opportunity for the industry to help South Africans make wise money choices to get their retirement planning back on track.

By Siphamandla Mkhwanazi, Senior Economist at FNB