Deep down, we all know that charitable giving is a good thing. We all have a passion for the great organizations and causes with which we are involved, but when push comes to shove very few of us incorporate regular charitable giving into our monthly budget.
It’s an easy thing to cut when you’re budgeting, and the idea of, “If I’m already short on funds, why would I give part of my income away?” is prevalent. I’m going to go against the grain here and let you in on a secret – giving a portion of income away is one of the first things I encourage my clients to do. Here’s why.
Charitable Giving Is for Everybody
I want to start by explaining my personal philosophy and relationship with charitable donations. I have no problem stating I’m a Christian. I think that my religion is part of what makes me me. Charitable giving is a concept that’s often discussed by Christians, and by religion overall. But let’s get two things straight:
- You don’t have to be Christian (or religious) to donate to charity. In fact, I think everybody should give what they can, regardless of their religious affiliations.
- Charitable giving has concrete, trackable financial benefits. From tax benefits to a better budgeting mindset, giving 10% of your after-tax income is a logical step.
The charities you donate to don’t have to be based in religion. You should find causes and organizations that you’re passionate about. If that’s your church, awesome. But it doesn’t have to be. I’m passionate about a lot of things – my faith, childhood education, my community, providing clean water to those who don’t have access to it, women’s rights, etc. I make sure my charitable donating reflects all those values. Each of us have benefited from someone’s kindness and generosity at one point or another. From the Little League jersey that was given to you to the High School Library you used regularly that’s named after someone you’ve never met.
Someone somewhere has helped you become the person you are today. This is the basis for my belief in giving. You are blessed, even if you don’t see it. And believe it or not, someone somewhere could benefit from your generosity, no matter the form or amount you choose to give. Somewhere along the way, we’ve all forgotten that we weren’t made to live this life on our own. I’m not saying to give your last penny to someone. In fact, I advocate you give your first penny.
The Emotional Benefits of Giving
You know that feeling you get after you do something kind for a friend, or after you spend your morning volunteering at the local food shelf? Giving of yourself is psychologically proven to bring you joy. Charitable giving is no different – you feel what some psychologists call a “warm glow” after you give monetary donations to causes you feel passionate about. Giving literally activates the brain’s pleasure centers – it makes you happy. I have a theory that it makes you happier for longer than the pleasure-boost you experience from, say, splurging on a few new pairs of jeans gives you.
If you follow my 10/20/30/40 budget, you’ll see that I advocate for my clients to budget 10% of their after-tax income and put it towards charitable giving. The theory behind it is this: You are blessed, even if you don’t see it. If you weren’t spending that 10% of your after-tax income on something charitable, what would you be spending it on? In all likelihood, it wouldn’t go toward something productive. That money would fall back into the spending pool and you’d end up with those few new pairs of jeans you really like but don’t really need rather than putting that extra 10% toward debt repayment or savings. This relates to the theory of marginal benefit and minimal return. Everyone has a certain amount of money they can spend to live and enjoy their life. At a certain point, more spending doesn’t equate to more joy. But charitable giving is a form of spending that continues to contribute to your joy.
Let’s dig a little deeper here. If charitable giving activates your brain’s pleasure centers and makes you feel like a rock star, that feeling translates to feeling like a financial rock star. That’s because you’re spending with intention. New jeans when you already have a drawer-full that fit at home or a few odds and ends from Target are not intentional expenditures. The initial happiness they bring will quickly fade.
Ultimately, they leave you feeling guilty. Like you fell off your budgeting bandwagon. Which makes you less likely to push forward toward your budgeting goals. Giving a portion of your income to a charitable cause that gets you fired up eliminates this issue. You’re spending your money on something that makes you feel good about spending that money – which means you’re more likely to stay on track financially and you’re less likely to impulse-spend on something that isn’t intentional.
The Financial Benefits of Giving
The emotional benefits of giving are reason enough to work toward donating 10% of your after-tax income. But, let’s face it, I’m a number’s guy. While financial planning is significantly influenced by emotion, there is usually a financial benefit to most of the advice I dole out. Charitable giving is no different. Here are a few of the benefits to charitable giving that positively impact your finances:
- If you itemize your deductions, charitable giving reduces your taxable income.
- By knowing what income tax bracket you’re in, you can optimize your charitable giving to be tax efficient. People in higher income brackets receive larger rewards for their donations.
- While there are limits to what you can deduct, they’re high. So, you can donate 10% and know you’ll be reaping the tax rewards of your donations.
- Ever hear of Alternative Minimum Tax (AMT)? If you’re like many of my clients, you’re stuck in AMT hell! Charitable giving is one of the only things you can deduct that isn’t an add-back to your total taxable income on your taxes. It will remain a benefit after deduction.
Cool, right? Basically, charitable donations make you feel financially intentional, emotionally awesome, and they circle back around to benefit you come tax time. Overall, there’s no reason why you shouldn’t start donating 10% of your after-tax income to a cause you’re crazy about. So, now that we’ve cleared up the “why,” let’s clear up the “how.”
Where and How Should You Donate?
There are a few things you should think about when you’re getting ready to donate.
- Pick a cause you’re passionate about. Donating to something random won’t leave you feeling like you’ve spent intentionally. You won’t be fulfilled, and you’re less likely to decrease unintentional spending as a result.
- Before you decide where to donate, make sure that the organization or group you’re thinking of donating to is a qualified tax-exempt organization. Most charities are, but it’s best to check.
- You also must donate cash (the 10% of your after-tax income I suggest meets this requirement) or property.
- You can also donate something better than cash – long-term appreciated stock held in a nonqualified account. Donate a portion of it and you won’t have to pay capital gains tax. And you’ll avoid paying capital-gains tax you would have paid on the gain at the time of sale.
- Remember that just pledging to donate to the charitable organization of your choice won’t have any impact on your finances – you must go through with the donation.
- Keep records of your donations. Without records, receipts, and the proper tax forms you won’t receive the tax benefits that come along with donating to charity.
Finally, when you get all the procedural stuff out of the way, you can get to the emotionally fulfilling part of donating – finding the organization you feel excited to donate to. There are a lot of causes out there that would benefit from your help. Which one speaks to you? Know that you can always change or reorganize your donations over time. If you feel inclined to donate to the local animal shelter this year, great! But next year, if you feel like your funds are better served going toward a food pantry, religious organization, or somewhere else – you have the flexibility to change your plans.