Below, you will find an unedited chapter from my new book about wealth building, investing and personal finance, The Ten Year Turnaround. To get your copy of the book, visit www.tenyearturnaround.com
“Only a life lived for others is a life worthwhile.” ~ Albert Einstein
There are only so many different things that you can do with money. You can spend it on yourself, you can save and invest it for the future or you can give it away. As I have begun to build wealth, I have realized that owning a lot of nice stuff doesn’t really make anyone that much happier. Sure, it’s fun to buy a new car, move into a nicer house and get the latest hot new gadget, but that happiness doesn’t last. A few weeks after a major purchase, the new thing that you just bought becomes a regular part of your life. You aren’t any happier than you were before and now you have one more possession to take care of.
Seeing your net worth go up each month also loses its luster after a while. Once you have all of your needs take care of, any additional money that you make invest starts to feel like monopoly money. Yes, the number in your brokerage account is going up every month, but it’s not changing your lifestyle in any meaningful way. You can continue to set money aside for “the future”, but your wealth doesn’t do anyone any good if you won’t ever need the money. Having a high net worth isn’t nearly as important as the process in which you build your wealth. In other words, the journey is more important than the destination. If you become a person capable of building wealth, it doesn’t really matter how much money is actually in your bank accounts because you can always go out and build more wealth.
What has created joy and happiness in my life is engaging in unique experiences through travel and giving money to worthy causes. Jesus said that it is better to give than to receive. This has definitely been true in my life. While it’s hard to communicate the joy that one can feel by doing good in the world with their money, giving to worthy causes has created far more joy in my life than owning a nicer car or a bigger home ever would. It’s incredibly rewarding to see other people’s lives fundamentally changed for the better because of your giving. Imagine how you could change someone’s life forever by building a school in Africa, by supporting a non-profit that rescues women from the sex trade or by funding a homeless shelter.
How to Discover the Joy of Giving
If you haven’t done much charitable giving in your life and have yet to discover the joy of giving, the best thing that you can do is find a cause that you are incredibly passionate about and watch your money do good work. For your first few gifts, I suggest giving to smaller organizations or a specific project at larger organizations so that you can see the tangible impact that your actual dollars have on an organization. If at all possible, volunteer some of your time at the organization so that you can meet the people that are impacted by the organization you are giving toward. You might also consider finding a needy family and helping them out directly so that you can see the immediate impact your dollars have on their life. The goal is to give to a cause that’s close to your heart and to a cause where you can see the immediate impact of your money. Watching what the power of your giving in action is the best way to discover the joy and personal happiness that charitable giving can bring.
While some people give to charity to get recognition and to be seen as a generous person, I think this is the wrong motivation for giving. The joy that you receive from giving should come from seeing your money do good in the world, not because you receive kudos from those around you for being a generous person. If you are only giving to charity because you want to receive recognition for your gifts, you’re missing the point. Giving should never be about what the giver can get out of making a gift. Giving is an act of humility, an acknowledgement that we are part of a larger world that doesn’t center around us and a recognition that we have a responsibility to take care of the world around us and the people in it.
How much money should I give to charity?
Depending on what survey you read, the average American family gives between 2% and 3% of their annual income to charity each year. In 2014, individuals gave a total of $258.5 billion to charity in the United States. Corporations accounted for $17.7 billion in giving and foundations accounted for $53.7 billion in giving in the same year (http://www.nptrust.org/philanthropic-resources/charitable-giving-statistics/). The average dollar amount of charitable gifts per family is $2,974 per year.
As individuals on the pathway to financial freedom, should we shoot for the average and try to give 3% of income to charity each year? Should we do less giving because we are trying to save money for the future, or should we give much more than 3% of our income based on our ability to produce income and do good in the world? Given that 1.3 billion people in the world live in extreme poverty and 2.5 billion people live on less than $2.50 per day in the world (https://www.dosomething.org/us/facts/11-facts-about-global-poverty), I can’t personally feel good about giving an average percentage of my income to charity. There are simply too many outstanding needs in the world for those of us that plan to be very successful to only give an “average” amount of income to charity. I believe that the most capable, most ambitious and most successful people in the world will need to give more of their time and more of their money than the average if we are going to solve the world’s problems.
Many major world Many major world religions, including Judaism, Christianity, Sikhism, and in some cases Islam, suggest that people give 10% of their income to charity. This is based on the ancient Judean principle of giving a tenth of their income, known as a tithe, to God. While religious organizations no longer have a monopoly on doing charitable works in the world, 10% of income seems to be a very good target as a baseline for the amount of money to give to charity. If Americans were to increase their annual giving from 3% to 10% of their incomes, there would be an additional $600 billion per year available for charitable organizations to good in the world. Jeffrey Sachs, author of The End of Poverty, estimates that it would cost $175 billion per year to eliminate extreme poverty in the world over the next 20 years. If everyone were to give 10%, we could eliminate extreme poverty and still have $425 billion left over to fight disease, solve social problems and fund religious activities.
If you aren’t giving any of your income to charity right now or are only giving an average percentage of your income, I suggest slowly working your way up to 10% or even beyond that. If you are giving 2% of your income this year, shoot for 3 or 4% next year and 5% or 6% the year after that. You don’t have to jump to giving 10% of your income right away and your long term giving target doesn’t even have to be exactly 10%, but I believe that is the general target you should aim for.
Won’t Giving Slow Down My Wealth Building Process?
If your primary financial goal is achieving financial freedom by building an investment portfolio that can pay for your living expenses, you might be tempted to not give while you build wealth so that you can achieve financial freedom faster. If you give $5,000 to charity each year, that’s $5,000 that won’t go into your retirement accounts. From a purely mathematical perspective, being generous comes at the expense of slower wealth building. When considering this trade-off, you are making the assumption that you will have the same income, opportunities and success regardless of how much you give to charity. If a new career or business opportunity came along and you made more money because you are known as a generous person, the math isn’t as clear cut as a basic spreadsheet might indicate.
In the business world, there are people that have an abundance mindset and others that have a scarcity mindset. Those that have an abundance mindset believe that there’s plenty of opportunity and success available to everyone and are more than happy to help others with their time and money. People that have a scarcity mindset believe that there is only so much success and wealth to go around and that they need to grab as much of it as possible and hold onto it tightly. People with a scarcity mindset regularly take and ask from other people, exhibit greed and rarely give back to anyone else.
It’s very easy to identify whether someone is operating out of a mindset of abundance or scarcity, and I believe that the best business and career opportunities present themselves to people that have an abundance mindset. By being generous to others with your time and money, you will naturally build a form of political capital with the community around you. You will build connections that you don’t have otherwise. You will be able to ask people for favors. People will think of you positively and more opportunities will show up at your door because you are well-respected and appreciated in your community. Conversely, most people are pretty good at sniffing out greed and selfishness. If you never help others and are only concerned about how you can help yourself, people will recognize that and keep their distance from you.
Personally, I have never thought of charitable giving as something that hinders or slows down wealth building. While there is an immediate trade-off of not being able to save more money because you are giving some of it to charity, I believe that is far outweighed by the opportunities that come around as a result of operating in a mindset of abundance. Of course, there’s not a 1-1 correlation between how much money you give and the success that comes back to you. However, I can attest that I wouldn’t have nearly the success that I have today if I hadn’t been generous and helpful to others along the way. Even if charitable giving did slow down my wealth building, I frankly don’t care because charitable giving is more important to me than growing my net worth faster.
Who should I give to?
There are currently more than 1.5 million charitable organizations, more than 315,000 religious congregations and more than 86,000 foundations in the United States (http://www.nptrust.org/philanthropic-resources/charitable-giving-statistics/). Given the wide variety of philanthropic organizations that are out there, it can be hard to choose which organizations are most deserving of your money. While the non-profit organizations that you land on will be invariably different than the ones that I have selected, I believe there are some basic criteria that anyone can use to evaluate whether or not you should give to an organization:
- Give Toward Your Passion – Select organizations whose missions you are genuinely passionate about. My firstborn son, Micah, was born 10 weeks early. That experience has given my wife and I a unique appreciation for medical care and research relating to premature babies. Because of our passion for this area, my wife and I support our state chapter of the March of Dimes. Don’t make a gift just because a fundraiser asks you for money, make a gift to an organization because you care deeply about its mission.
- Give Through Relationships – Favor organizations where you have a personal contact over organizations that you have no personal affiliation with. When you know someone at an organization, you can more easily get updates as to what the organization is doing and be aware of opportunities to serve with your time in addition to your money.
- Verify Use of Donor Dollars – Let’s face it. Some non-profits are run much better than others. Some non-profits are beacons of efficiency and the vast majority of the money they receive goes toward their mission. Some other organizations don’t spend money well or they spend a large portion of the money they receive on additional fundraising and administrative expenses. As I write this book, the Wounded Warrior Project was recently called out for having overhead expenses that amounted to 40% of its total giving (http://www.washingtontimes.com/news/2016/jan/27/wounded-warrior-project-accused-of-wasting-donor-m/). I would imagine most of their donors would be shocked if they knew that only 60% of their gifts were going to help veterans. Use websites like Charity Watch (charitywatch.org), Charity Navigator (www.charitynavigator.org) and the Evangelical Financial Accountability Association (www.efca.org) to determine how much of an organization’s money is actually going toward their mission. You can also look up financial reports for non-profits on Guidestar (www.guidestar.org) and look up ratings for charities on the Better Business Bureau website (http://www.give.org/reports/index.asp).
- Don’t Make Small Token Gifts – If someone from a large national charity asks you for money that you aren’t interested in, you might be tempted to give them a token gift of $10.00 or $25.00 to appease them. Given that many large charities pelt their donors with direct mail, the organization may be better off not receiving a gift from you at all. If you make a single token gift and the organization spends more money than you gave trying to get you to make additional gifts through direct mail, you haven’t done anyone any good with your gift.
- Don’t Give Out of Obligation – I don’t recommend making gifts just because a fundraiser asks you for money or because you feel obligated to give to a specific charity. You may end up with a sense of resentment toward the fundraiser that asked you for money or for the organization as a whole. Giving should be a fun, joyful and rewarding experience. If you can’t cheerfully give money to an organization, you are better off to redirect those dollars to somewhere you feel better about or simply not give at all.
- Give Deep, Not Wide – Consider giving more money to fewer organizations than less money to a larger number of organizations. When you focus on a few select non-profits, your giving becomes much more impactful to the organizations that you support. You are also reducing the total amount of fundraising expenses that get spent on you, because the organizations that you don’t give money to won’t be spending time and money following up with you.
It may take you a while to find non-profit organizations that meet these criteria in your life. You may not be sure where your passion lies yet or maybe you just haven’t found the right organization to give to yet. Don’t let this stop you from giving all together. Until you have identified the 3-5 organizations that you want to support well, focus on the one or two that you already know that you want to give to. Over time, you will identify additional organizations that you want to support financially.
Consider Using a Donor Advised Fund
Most people will write a check or make gifts online to the charities that they support. If you give away a sizable amount of money each year (more than $25,000), you might consider giving through a donor advised fund (DAF). A donor advised fund allows you to set aside money in an investment account, receive an immediate tax deduction and give that money away at any point in the future. While using a donor advised fund adds an extra step to the process of giving, there are some neat features that make using a donor advised fund very useful:
- One Giving Receipt – Because you are effectively giving money to a charity that will later give away money to another charity, you receive a single tax receipt at the end of the year for all of the different non-profits that you give money to. You no longer have to chase down small charities that don’t have their books together to get a giving receipt to claim your gift on your taxes.
- Giving Appreciated Assets – If you have stocks, bonds, mutual funds or other securities that have appreciated in value, you can give those assets to your donor advised fund without having to pay capital gains taxes on that money. For example, let’s say that you have $10,000 that you want to put in your donor advised fund and $10,000 worth of a stock that has appreciated in value. Instead of putting the $10,000 into your donor advised fund directly, you transfer the stock into the donor advised fund, then re-buy the $10,000 position you had in that stock. While the end giving result is the same, you’ve eliminated the capital gains tax liability by giving the stock to your donor advised fund and repurchasing it with cash.
- Flexible Giving – With a donor advised fund, you have the flexibility of distributing your money over time. If you want to receive a deduction for a charitable gift you make in one year and distribute the money the following year, you are free to do that.
- Saving for a Big Gift – You might want to save up for a very large gift, say $100,000 or $1,000,000, over time. With a donor advised fund, you can set money aside over time and invest the money into mutual funds. Any interest or capital gains earned by the investments while in your donor advised fund will be tax free. You also receive current tax deductions for the deposits you make while saving up over a period of years for your big gift. When you’ve reached your desired dollar amount, you can sell the investment inside of your donor advised fund and have a check issued to the charity of your choice.
- Anonymous Giving – If you want to make an anonymous gift to a non-profit and write a check, it will never be truly anonymous because someone had to cash your check or process your credit card to receive the gift. Even when you want your giving to be private, your name may still appear on an internal donor list and be widely known within the organization you are giving to. With a donor advised fund, you can make a truly anonymous gift. The organization administering the fund, such as Vanguard Charitable or Fidelity Charitable, can send a check to the non-profit of your choice that doesn’t have your name or the name of your donor advised fund on it, so that your gifts are truly anonymous.
Donor advised funds have some very useful features for serious givers, but they often have high minimums and minimums per gift. Fidelity, Schwab, T. Row Price all offer donor advised funds. The minimum opening account balance ranges from $5,000 to $25,000.00. The minimum size per each gift made from the donor advised fund ranges from $50.00 to $500.00. The brokerage managing your donor-advised fund will take a 0.5-0.6% management fee per year for any investments inside your account to cover their costs. I personally use the donor advised fund offered by Vanguard Charitable, primarily because my other assets are at Vanguard and it’s easy to transfer an appreciated stock from Vanguard to Vanguard Charitable.
A Note for Christians about Giving
Making charitable giving part of our everyday lives is especially important to those of us that are Christians. The Bible is clear that followers of God are to be generous givers. As early as the book of Genesis, Abel made an offering back to God from his crops. Later in the Old Testament, the law prescribed that the Jewish people give a tithe (tenth) of their income to provide for the priests (the Levites), for the various festivals of their religion and for the poor. In the New Testament, Jesus set the expectation that his followers would be givers (Matthew 6:1-4). The early church set an example for future generations with their generosity (Acts 4:32-37) and the apostles instructed their followers to give generously and cheerfully (2 Corinthians 9:6-15) to the church and to those in need. Let there be no doubt that generosity is a core tenant of the Christian faith.
Christians are called to use their financial resources to provide for three different categories of need. First, Christians are called to use their money to help those in need. Christians are to feed the hungry, give drink to the thirsty, clothe the naked, care for the sick and visit the imprisoned (Matthew 25:34-40). This call is echoed in the book of Proverbs, which says “whoever is kind to the poor lends to the Lord, and he will reward them for what they have done” (Proverbs 19:17). Second, Christians are called to support pastors and evangelists for their work. This calling is most clear in 1 Corinthians 9, where the Apostle Paul wrote “those who preach the gospel should receive their living from the gospel.” Every Christian should support their church financially at some level. Finally, Christians should help provide for the needs of other believers (Acts 4:32-37). When you become aware of a fellow Christian in financial need, you should follow the example of the early church and do whatever you can to help meet their needs.
Christians debate back and forth how much they should give to the church and to other charitable organizations. Some argue that Christians are supposed to give 10% of their income to the local church. Others agree with the concept of a tithe but believe that the money can be given to other religious organizations in addition to the local church. Yet others say the tithe was only for the Jews and does not apply to Christians today because Christians are not under the Old Testament law. Theologians that are much smarter than I am have debated this point back and forth, so I won’t try to tell you definitively whether or not the tithe is still the standard for Christian giving. Rather, I will point you to Paul’s words on giving and allow you to make your own decision about how much you should give:
“Remember this: Whoever sows sparingly will also reap sparingly, and whoever sows generously will also reap generously. Each of you should give what you have decided in your heart to give, not reluctantly or under compulsion, for God loves a cheerful giver. And God is able to bless you abundantly, so that in all things at all times, having all that you need, you will abound in every good work.”
Regardless of how much you give, Jesus is clear that Christians should be giving for the right reasons. He warned his disciples not to give for the sake of being admired by other people. He said, “Beware of practicing your righteousness before men to be noticed by them. If you do, you will have no reward from your Father in heaven.” (Matthew 6:1). He further instructed his followers to give anonymously, saying that “when you give to the needy, do not let your left hand know what your right hand is doing, so that your giving may be in secret” (Matthew 6:3-4a).
Conclusion
While charitable might only seem tangentially related to wealth building, it has been an important part of my ten-year turnaround. I believe that those of us who are on the path to financial success have a responsibility to help others and take on the world’s problems with both our time and our money. If you are not currently giving to charity, I would strongly encourage you to find a single organization whose mission you are passionate about and make your first gift. If you are already giving, I would encourage you to consider how you give more or give more effectively to the charitable causes that you care about.
Action Steps
- Decide what percentage of your income you want to give to charity over the long term.
- Begin to identify 3-5 non-profit organizations that you want to become a long-term supporter of with your time and money.
- Consider using a donor advised fund for your giving.