Paul's Insights: Pandemic makes us more proactive about money
There’s nothing like a crisis to jolt us into action, and research by RateCity shows that 42% of Australians are more proactive about managing their money as a result of Coronavirus. Young Australians in particular are taking the bull by the horns. Six out of ten 18-34-year-olds now take more of an interest in money matters.
One of the big impacts of the pandemic is that we’re saving rather than spending. An extra $64 billion has been deposited into bank accounts since March, helping households build a valuable buffer of emergency cash.
We’re also taking a closer look at personal debt. Credit card debt attracting interest has dropped 20% since March, and over 110,000 home owners have refinanced their mortgage, presumably to get a better deal.
In a year that’s been challenging for all of us, these are positive changes. I suspect a lot of the growth in savings reflects travel plans that have gone up in smoke, a reined in nightlife, and uncertainty around job security.
Whatever the case, taking the time to get your money matters in good shape now, will leave you better placed to handle any financial challenges that lie ahead.
The question is, with rates so low, are you making the most of your extra savings?
This is where it’s important to look at both sides of the ledger. If you’re growing savings while also carrying high interest credit card debt, it’s a no-brainer that you’re likely to be better off using savings to pay down debt. You could be earning just 2% on a savings account while paying double-digit interest on card debt.
If you don’t expect to need cash savings over the short term, it can make sense to invest any excess to earn a better return. This calls for thinking about long term goals.
Investing surplus savings in the sharemarket through, say, an exchange traded fund (ETF) does mean taking on more risk. The payoff can be higher long term returns. In the six months since global sharemarkets nosedived as a result of COVID-19 lockdowns, the ASX 200 Total Returns Index (which includes dividends) has climbed 30%. When it comes to savings accounts, the Reserve Bank has made it clear that interest rates will stay at historic lows for some time, potentially several years.
The main point is that taking an active interest in your financial wellbeing is a smart move at any time. Amid the uncertainty of a pandemic it’s doubly important. Having a pool of savings gives us choices over our financial lives, something that can be very reassuring at a time when we all face plenty of unknowns.
Paul Clitheroe is Chairman of InvestSMART, Chair of the Ecstra Foundation and chief commentator for Money Magazine.
Frequently Asked Questions about this Article…
The pandemic has made 42% of Australians more proactive about managing their money, with young Australians particularly taking a greater interest in financial matters.
Australians have increased their savings, with an extra $64 billion deposited into bank accounts, and have also focused on reducing personal debt, such as credit card debt and refinancing mortgages.
With low interest rates, it's crucial to manage savings and debt effectively because savings accounts offer low returns, while credit card debt can have high interest rates. Paying down debt can be more beneficial than holding onto low-yield savings.
Investing surplus savings in the sharemarket, such as through an ETF, can offer higher long-term returns despite the risks, as evidenced by the ASX 200 Total Returns Index climbing 30% in six months post-COVID-19 lockdowns.
Having a pool of savings provides financial choices and reassurance during uncertain times, allowing individuals to better handle financial challenges and unknowns.
If you don't need cash savings in the short term, consider investing the excess to potentially earn better returns, keeping in mind your long-term financial goals.
The pandemic has led to reduced travel and nightlife spending, contributing to increased savings as people adjust their financial priorities amid job security concerns.
Taking an active interest in financial wellbeing is crucial during a pandemic because it helps individuals build a financial buffer and make informed decisions in the face of economic uncertainty.