The holiday season is statistically the most popular time of year for people to donate to charity. Typically, when giving advice, I caution against jumping on any kind of financial bandwagon. But this holiday-giving trend is something I can get behind – and I suggest you do the same.
The holiday season is statistically the most popular time of year for people to donate to charity. In fact, one third of all charitable giving is done in the month of December. Crazy, right? Typically, when giving advice, I caution against jumping on any kind of financial bandwagon. But this holiday-giving trend is something I can get behind – and I suggest you do the same.
There are so many different reasons that charitable giving should be incorporated into your financial life. First, giving back is an excellent use of your funds. I’ve said it before and I’ll say it again – we’re all more fortunate than we believe.
Someone, somewhere wishes that their good days were as good as your bad days. Using your wealth to give back to a cause you feel passionately about is a good reminder that your financial situation isn’t as unfortunate as you think it is – even if you’re stressed out of your mind about the amount of debt you’re in, your low income, or paying for retirement.
Charitable giving also has positive psychological benefits. Giving to charity stimulates the pleasure centers in your brain, which means that donating literally makes you feel good. Another theory, called “warm glow,” states that people derive pleasure from charitable giving because they love making the decision to give.
Choosing where, when, and how much you’re donating gives you the feeling that you’re doing something to help the causes you care about – because you are. It’s a positive way to get involved and give back that doesn’t necessarily involve spending a vast amount of time (which many medical professionals don’t have enough of as it is).
Finally, giving has some financial benefits, as well. If you itemize your tax deductions, giving to charity can help to reduce your total taxable income. Of course, there are some limits on what you can deduct, they’re high.
You can easily donate a small portion of your income and know that you’re reaping the maximum tax benefits from your donation. It’s also important to keep in mind that if you’re currently dealing with Alternative Minimum Tax (AMT) – charitable giving can help to get you out of the vicious cycle.
How should you give to charity?
The first step in putting together a holiday time charitable donation is to clarify where you want to donate and why. Just donating for the sake of donating won’t do you any good – and, honestly, it could mean that your monetary donation doesn’t go as far as you’d like it to. Find a charity that’s listed as a 501©3 organization to ensure you’ll get the tax deduction credits you’re looking for. Keep in mind – this doesn’t really limit your donation options. There are thousands of 501©3 organizations out there for you to access!
As you narrow down your causes, try and dig deep. What inspires you? Who in this world do you want to help? Everyone’s answer to these questions is going to be very different – and that’s okay. You don’t have to select a specific charity right away. Often knowing the causes you want to help will guide your charity selection process.
When it comes time to donate, make sure you keep a record of the donation. Request a receipt, and hold on to it. Remember – if you buy something that goes toward a charitable cause, you can only deduct the market value for that item. So, if you buy a table for a charity dinner, you only get to deduct the fair market value of the dinner itself (not the actual price you paid).
How do you incorporate charitable giving into your budget?
Any time you think of spending any large sum of money on something, it’s important to evaluate how it fits into your budget. I usually recommend that my clients contribute 10% of their total annual income toward charitable donation – all year long. Whether you contribute small amounts regularly as auto-deductions from your account, or you contribute a lump-sum at year-end, 10% is the rule of thumb I follow.
This 10% figure didn’t come out of thin air – I’ve put some thought into this. It’s a small enough amount that you won’t truly miss it from your paychecks, but it’s large enough that you will be making an impact with your donation and reaping both the psychological and financial benefits. I believe so firmly in charitable donation that I have it incorporated into my recommended budgeting template – the 10/20/30/40 budget.
If you’re interested in how the 10/20/30/40 budget works, I have a FREE budgeting worksheet for you to check out! Download it here – and feel free to reach out with any additional questions!