How do we define morality? Morality is defined by dictionary.com as “conformity to the rules of right conduct; moral or virtuous conduct.” How does morality in finance then affect the way we act when managing personal or others’ finances? I believe so much of that can be defined by a single word: responsibility. In a time of cancel culture and entitlement, responsibility for one’s actions seems to be hard to come by.
Credit Cards, Student Loans, Car Notes, Investing, and Mortgages: while none of these items is Immoral in and of itself, any and all of them can lead down a path that can challenge our virtues and morality. How does this happen? Let’s dig a little deeper in each of these five items to understand how they can be useful in personal finances, while attempting to ensure that it doesn’t negatively affect our moral compass.
Credit Cards can be useful to an individual allowing them to build up a credit history and, over time, increase their credit score. Is a credit score necessary to be successful? I believe this answer is three-fold. First, I believe financial independence and success can be achieved without carrying large amounts of credit card debt. Personally, I don’t use Credit Cards today as I generally like to put my dollars to work for me and not into paying back the bank. Second, if you are using credit as leverage in a business or investment, there are steps you can take to ensure those obligations are met which helps your credit score. Lastly, there is a point when credit card debt accumulation can have a negative effect on your credit score. While this isn’t generally a good spot to be in financially, it hasn’t yet affected the moral compass. How can carrying credit card debt be immoral? It stems from personal responsibility and understanding that any debt obligation you sign your name to is yours to keep or yours to payoff.
Student Loans can be one of the worst types of debt that anyone can take out. Bankruptcy cannot wipe out what you owe on student loans, as it does to so many other debt obligations. Why do so many individuals think that going to a state school or community college isn’t cool? Why do they want to cross state lines and go to another college to enroll in the same majors as their in-state school offers? Why do they want to live on campus if they are in-state? I’ll list a few that come to mind:
o Private college feels elite
o Private college offers better opportunities Post-graduation
o Freedom to live on their own
o Friends are going to an out-of-state school
o Opportunities to meet more people, than commuting
While the reasons I have listed above may not be an exhaustive list I believe it gives us enough information to discuss why this is such a huge down fall in managing finances well. So many people want to have a name from a certain college on their diploma, thinking this is there ticket to success. However, what most teens and parents fail to realize is very few Institution names impress a hiring manager. And below you can see the difference in average price nationally from https://educationdata.org:
o Community College - $ 10,300 annually
o In-state College - $ 25,615 annually
o Out-of-State College - $ 43,721 annually
o Private College - $ 53,949 annually
Are you doing the correct thing by going to the cheapest college available on an annual basis? Not necessarily, there are many situations and factors at play here including scholarships, grants, and work-study programs. Each of these items lowers the amount owed for you to participate in the schooling you desire. Where the situation turns sideways for so many is that they drop out, change majors, or go to school for 4+ years and most graduates have little to no experience in the field they have studied during that time. This opens up the door to having the fight with morality. Now you come into the workforce eager and ready to build a successful career. The problem is the annual salary you thought you would make once you graduated is far less than you envisioned. You have Rent, utilities, groceries, and now the student loan payments come up. This adds about $400 to your already tight budget, if you are in-line with the national student debt averages.
Morality in managing finances can be a much greater challenge to those who are at or below the break-even point of their monthly, quarterly, or annual budgets. And one of the greatest obstacles faced for so many of these folks is the debt obligations they face. So many people use feelings to dive into a purchase of a home, car, or tools instead of thinking through the process and understanding it is ok to say NO. Saying no to yourself or your spouse may be a challenge you struggle with however I want to give a small piece of advice here, those impulse buys decrease by a dramatic percentage when you sleep on a decision. A number of things happen when you sleep on it, you get to see the full picture, you don’t have a salesman or realtor breathing down you neck for a decision, and you get to talk about how this decision will affect the coming years as it relates to your debt obligations.
Car Notes are not a necessity! Too many people think I have to get a car note to get the car I want. If the car you want is a brand new model then maybe you will have to get that car note to pay for it. But also realize that the majority of cars you purchase for daily driving, will lose about 10% the minute you drive it off the lot. For someone who is trying to manage their finances well this doesn’t seem like the best approach in generating wealth. It also comes with a hefty monthly payment of roughly $550 on a five year note. This doesn’t include the maintenance, insurance, or gas spent to operate the vehicle. With these expenses added in your car more than likely costs you $1000 monthly to operate. This is one area that I recommend avoiding. Buy a car you can afford with cash or minimum payments and also setting aside an allotted amount to pay-off the loan early and for maintenance. This is one area of my life that I have been fortunate enough to avoid the pitfalls of car notes, though my cars are 12 and 16 years old respectively, I paid cash for each and maintained them over the last 6 years. This allows for more opportunities to invest which will be the next topic of discussion.
Any dollar you can throw into a stock market investment for a 1, 3, 5 or 10 year period can make a huge difference. On average a 1 year periods will return favorably 73% of the time, 3 year periods 83%, 5 year periods 87%, and 10 year periods 94% of the time will be favorable. The longer you are able to leave your money in the markets the greater chance that you will make money in that timeframe. While stock market investments are a great way to make money, one of my favorite investment vehicles is real estate. Owning a home is great owning multiple homes is better, if you can generate cash flow from those investments. I am coming up on 9 years of marriage this month and my wife and I have owned 4 houses in that timeframe. 3 of the 4 homes we bought were either foreclosures or below market value through for sale by owner purchases. These types of properties once restored can generate a very nice return on investment. However, one thing I always try to be cognizant of when going through the rental process is how likely am I to receive my rent check on time and how can I make this feel like a place that they consider their home. This has helped me in successfully managing properties as in nearly 5 years I have only had 2 tenants move out of a property. While one went on to purchase a house of their own my other tenant moved from one of my properties to another as an upgrade to their living situation. I try to manage my properties in a way that fits my values and in doing so achieving more than just $$$’s at the end of the day.
Mortgages, this is one of the most common forms of debt in America. And to me this is one of the few types of debt that I ever suggest anyone should take out. The main reason is your mortgage is backed by a real asset that appreciates in general over time, unlike that car that is sitting in the driveway depreciating, as the debt obligation decreases. Like any debt taken out, doing the right thing by paying it on time and in full over time are key to managing your finances well. When it comes to a home or any type of debt obligated product if you own it outright that is the greatest spot to be in. This enables you to free up cash flow to drive other investments which is a major key to being able to create wealth.
While the 5 products I discussed above are not a complete list of things you could run into a moral fight with, I believe they an integral part in so many immoral decisions. Not paying a bill or managing your finances and going out to blow the money earned on something that feels good can lead you down a slippery slope. Making the right or mature decision takes DISCIPLINE and when that is practiced over time it creates a great responsibility and helps us understand the morality in finances.