The coronavirus is throwing up a lot of problematic financial questions. What are households supposed to do during this period?
COVID-19 is causing immense suffering in many countries. We just have to stay in control of what we can affect, like social distancing where possible and our finances.
Hopefully you have enough money coming in to support your household’s necessary expenditure, whether that’s from normal earnings or from government support.
If you’re in a position where your earnings outstrip your expenses then you can allocate that extra money to improving your net worth.
Should you pay down debt or invest with the money?
Reasons to pay down debt
Debt is a huge business in Australia. There are major ASX banks like Commonwealth Bank of Australia (ASX: CBA), Westpac Banking Corp (ASX: WBC), Australia and New Zealand Banking Group (ASX: ANZ) and National Australia Bank Ltd (ASX: NAB) that make billions of dollars of profit each year. There are lots of other ASX businesses that are involved in debt, such as debt collectors like Credit Corp Group Limited (ASX: CCP).
These businesses make their profit from us. We don’t want to have any more debt than necessary and we should try to pay it down. Debt is the main thing can cause bankruptcy.
Being able to pay down debt is a really good thing. Compound interest can work against you as well as for you. And we have to pay debt with our after-tax money, which is a real drain on our finances.
It can be very relieving to pay off debt. Paying off debt might not be the best choice on a spreadsheet, but it can make a big difference for your mindset.
However, you have to remember that interest rates in Australia are now the lowest they’ve ever been. With debt cost at such a low cost, if it were me I’d personally not be in a rush to pay off ultra-low-cost debt.
Reasons to invest
I think the best way to grow your wealth over the long-term is with shares. They show great compound interest capabilities with businesses able to re-invest profit back into the company for more growth in future years.
The best time to invest in shares is when prices are low. The coronavirus has caused the S&P/ASX 200 Index (ASX: XJO) to fall heavily from the heights reached in February.
It has been a few years since the share market was this low. Some of the ASX’s best shares like Altium Limited (ASX: ALU), REA Group Limited (ASX: REA) and SEEK Limited (ASX: SEK) have been sold off heavily.
After the GFC the share market recovered strongly. Whilst shares might be go lower in the coming months, I think the market may produce solid returns over the next few years.
Putting your money towards paying debt or investing is usually a good thing to do. Whilst it’s always good to get rid of debt, I personally think the better choice right now is to invest because of how low the cost of debt is and how low share prices are.
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Motley Fool contributor Tristan Harrison owns shares of Altium. The Motley Fool Australia owns shares of Altium and National Australia Bank Limited. The Motley Fool Australia has recommended REA Group Limited and SEEK Limited. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.