Beating Broke

Personal Finance from the Broke Perspective

Ethics and Morality in Personal Finance

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Personal finance isn’t all just about the best ways to save money and live frugally.  There are other things to consider; other rules that should be followed.  Some have absolutely nothing to do with saving money.Many of the posts here at Beating Broke deal with saving money, budgeting, and living frugally.  On many occasions I have drummed on the amount of debt that we all take on and the ways that we can go about budgeting to make that debt go away.  Deep in the root of that is a moral standard.  I believe we have a moral responsibility to not spend more than we earn.  And, because each dollar of debt, holds some risk of default, I believe we also have an ethical responsibility to budget so that we don’t default on our debt.

In the process of paying off our debt and saving money, many of us will be faced with a moral or ethical dilemma.  Perhaps you bought a bunch of things at a department store and the teller didn’t notice that one of the items rang up for less than it was supposed to be.  Or maybe the teller only rang up one item when there were really two.  Many of us have been faced with just such a situation.  And many of us, in our struggle to reduce our spending and debt, probably didn’t say a thing.  I know I have.  And I felt guilty about it.  Morally, and ethically, we have a responsibility to pay the correct price for an item, and to pay for the correct amount of items.  Even though I admit to not doing anything, I do try to keep myself honest.  Ill gotten gains are gains you’re likely to lose.  Call it karma, or whatever you like, you’ll feel the reverberations of your acts.

Perhaps more-so than in paying off debt and saving money, ethical and moral dilemmas can arise after we’ve paid it all off.  Suddenly, we find ourselves with an abundance of spendable money that we can save or do what we want with.  It’s not earmarked for any debt, and we’ve already paid ourselves.  The situation has changed, but we still have a moral and ethical obligation to do what is right.  If you’re investing your money, do you invest in so-called “sin stocks”?  The stocks of cigarette and alcohol and other indiscretions.  Again, I know I have.  I am still a shareholder in the parent companies of both Marlboro and Camel.  I’ve owned others in the past.  Depending on how you feel about those companies, a ethical dilemma could come up.  As a generality, those companies have rather solid stock and usually pay dividends.  If you feel that those companies are responsible for cancer and death, can you ethically allow yourself to support them by becoming a share owner of that company?

As debtors, we all despise the credit card companies who charge double digit interest rates and hide fees around every corner.  Banks too.  As someone who can now invest money rather than paying those credit card companies and banks, deciding how we feel about those rates and fees can be another dilemma.  If you’re one of the lucky ones  whose state has allowed access to the peer-to-peer lending companies, you have the ability to invest in loans that carry rates that are very much the same as what a credit card company or bank would charge.  The table has turned.  If you were against it when you were paying the rates and fees, can you ethically charge them?  Morally, should you?

I think that many of us look too closely at the technical aspects of personal finance.  We study amortizations schedules and debt snowballs.  We talk endlessly about our retirement funds and the ways that we are going to build them up.  And, while it is there as an undercurrent, we sometimes fail to see the moral and ethical currents that run in the background.  And sometimes, we allow our technical expertise and know-how overcome our moral and ethical compasses in order to make our debt snowball roll a bit faster.

If you truly want to win at personal finance, you have to find your moral and ethical limits and remain steadfast in their direction.  We all fail to do that occasionally, but, as the old saying goes, you’ve got to get back up and try again.

Debt Avalanche? Correct?

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There are many theories as to how best to pay off your credit card debt.  One, the Debt Snowball, was popularized by Dave Ramsey and has many followers.  In it, a borrower pays off the lowest balance rate card first and then “snowballs” the payment from that card onto the next lowest balance until they are all paid off.  One of the benefits of doing it this way is that you get a “quick win” when you pay off the first card.  And because you are “snowballing” the payments onto the next card, as the balances go up, so does the payment and your first “quick win” turns into another. Then another.

Flexo at Consumerism Commentary seems to think that that isn’t the best way to do it.  According to him, the method that he calls the “debt avalanche” is the “correct” way to pay off debt.  In this method, you arrange your debts in order of highest interest rate first to lowest interest rate last.  As you pay off your debts, you are saving more money on interest and paying the grand total off in a faster length of time because of it.  In his words:

By choosing the Debt Avalanche method, you will pay off your total debt faster, you will pay less interest, and you are mathematically efficient.

And he’s right.  Mathematically.  And if we are all robots, it will work for each and every one of us.  What he fails to do is take into account the human factor.  Let me make an example for us.

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