How (and why) to give your money away
"Wait, what? Why are you telling me to give away my money? You're a financial advisor -- isn't it your job to help me keep my money?"
No, it's not. It's my job to maximize not just your return on investment, but your return on life. And giving your money away is a core part of that.
Let me explain, and then I'll get into some thoughts on how to optimize your giving. (I'm an engineer, after all.)
Giving is an efficient happiness-per-dollar investment
OK, that's a very nerdy way to say it, but I want to make the point clear: if you want to spend money in a way that increases your happiness and fulfillment, giving is a great way to go. Dr. Elizabeth Dunn is a researcher who wrote a whole book on Happy Money, and "investing in others" is one of the five Pillars of Happy Money she uncovered in her research.
I get why this might be surprising; if I'm spending money on others, how does that make me happy? It turns out that it's because of biology -- generosity is a trait that's wired into us at the neurological level.
Now, if you're of a religious nature, you may already have a practice of giving. Still, it's worth thinking about the fact that we're biologically wired to do so, and viewing it not just as a duty, but as a joy!
Of course, our native generosity has to compete with other traits, like greed, fear, and simple laziness, so it's understandable that it won't always win out.
"Fear is the mind-killer"
And that turns out to be all the more reason to make giving a priority. Do we want to be more greedy, fearful, and/or lazy, or do we want to be more generous and joyful? By giving, we develop a habit that pushes us slightly toward the latter.
More importantly, we force ourselves to do some internal work. If there's resistance to giving money away, is it rational? "I'm $30,000 in credit card debt" or even "I have no emergency savings" are fair reasons to curtail giving. "I might want the money someday", though, bears further investigation. Is that your rational brain talking...or your fear?
If it's your fear, then giving your money away -- even starting small -- is a great way to pry yourself from that fear's grip. The more you give and discover that (a) it makes you happy, and (b) no disaster resulted because of it, the weaker the hold fear has on you. It's a neat little virtuous cycle.
Counting the cost
Of course, you may not have a clear enough picture of your finances to know how much you can afford to give, and what (if anything) you would have to sacrifice in order to do so. If this is you, do not -- I repeat do not -- simply put your hands over your eyes, quote something about abundance, and just give.
Yes, we're wired such that giving makes us happy. Yes, most religions extoll the virtues of charity. But no, this is not an excuse to be mindless! Now by "mindless", I don't mean "brainless", here, but rather "the opposite of 'mindful'". Not paying attention. Not being self-aware. That's not a virtue -- that's a vice.
So in order to give effectively, you have to become aware of your financial picture. And that's a good thing, too, all by itself!
How much?
When clients are convinced that giving is a good thing, the next question is often "how much"? Now, you know me -- I love to have numerical frameworks like Monte Carlo simulations and risk/reward curves to find the "sweet spot". Here, though, I don't have a good equation for you. However, I do have one word: more.
How much? More than you gave before. If you're just starting and your cash flow is tight, start small -- even just 0.5%-1% of your pre-tax income. If you've got more money than you know what to do with, try starting with 10%. A tithe is likely enough that you'll have to make some kind of (small) sacrifice, and enough that you can likely make a real difference in someone's life, but not so much that it'll completely upend your life.
Regardless of where you start, though, look at giving a little more each year, again as a percentage of your income. In my experience, both first- and second-hand, it's like working out or investing: the more you put in and improve, the better the outcome. Don't stagnate; keep moving forward, even if slowly.
Finding a good "target"
The question immediately after "how much should I give?" is often "who do I give the money to?" The answer is highly personal, but I recommend you focus on connection.
What do I mean by that? Several things. For one, don't assume that you "have" to give your money to an institution! Think about your friends and family -- how might you help them out? Maybe you can create a "slush fund" where you set aside money in case a loved one has a need (large or small)? Or you can be proactive -- even just treating someone to coffee can brighten their day. (Hint: for them, it's not about the coffee.)
And if you do give to an organization, give to one that resonates with you. What causes, ideals, people, places, institutions, etc. do you have a connection with? Do you want to give to a local museum, because art has greatly impacted your life? Do you want to give to a national environmental organization, because you love parks and want to see them conserved?
Moreover, I recommend giving to an organization you can get involved with. Sure, it's nice to write a check (well, set up an electronic transfer, but you know what I mean), but isn't it even better to see the impact of your giving with your own eyes? To meet and/or work alongside others who have a similar passion? (Yes, introverts, I'm even talking to you.)
Now, some people can immediately come up with a charity that resonates with them, but often that's (understandably) not the case. If something doesn't immediately spring to mind, consider Charity Navigator. They have an excellent listing of charitable organizations, and allow you to filter based on several criteria. Moreover, if you're keenly interested in the stewardship of your dollars, they have several ratings that reflect their evaluation of organizations' accountability, transparency, and financial health.
Think about taxes
Just because aspect of giving are amorphous doesn't mean we shouldn't optimize! When you give, I recommend thinking about the tax implications, and how you might stretch your dollars as far as you can.
First, if you've got investments with a low cost basis (for example, from a stock benefit plan), I recommend donating them rather than donating cash. It's a win-win for you and the charity, and is a great way to diversify out of stock, besides! (Just don't forget: make sure you've had the investments for a year and a day, so they're eligible for the favorable tax treatment.)
Also, note that due to the tax reform that went into effect in 2018, it's now much harder to get an itemized deduction for charitable donations than it was before, given how high the standard deduction is. Consider combining multiple years of charitable donations (and other deductions!) into a single year, in order to push yourself above the standard deduction threshold.
And if you really like giving a monthly donation, and thus giving stock is a headache or giving once every few years just sits ill with you, consider a Donor-Advised Fund. A DAF is a way to create sort of a mini-endowment, where you donate to the DAF, take the charitable deduction, and can then give from the DAF to the charitable organization however you like.
As an example: let's imagine you want to give $500/month to charity for the next five years, for a total of $30,000. Let's also imagine you have $30,000 in your investment account between RSU's and ESPP shares. Rather than just giving $500/month, you could donate the $30K in investments to a DAF, then grant $500/month from the DAF to your charity. This would benefit you in several ways:
You would get the entire $30,000 deduction this year, allowing you to easily surpass the standard deduction. You can then take the standard deduction in following years.
You would avoid any capital gains tax on the taxable investments.
You can invest the DAF any way you like, immediately selling the shares you transferred and investing the proceeds in a diversified portfolio within the DAF. Like I said: mini-endowment!
You could use the $500/month in cash flow to replenish the taxable account. Effectively, you've just diversified out of those employer shares, but with zero tax liability.
Your charity gets its $500/month, just the same as if you'd donated directly.
Of course, I recommend talk to your CPA and/or financial planner before you do this; there are always details and gotchas to consider! You can always talk to me, of course -- some of my favorite client conversation involved figuring out how to best give their money away!
Britton is an engineer-turned-financial-planner in Austin, Texas. As such, he shies away from suits and commissions, and instead tends towards blue jeans, data-driven analysis, and a fee-only approach to financial planning.