My sister is extremely generous. As a kid, she delighted in pretending to take the family’s orders one-by-one, then carefully carrying out miscellaneous items from the kitchen meant to represent our hamburgers (me), filet mignon (dad), and lobster a la carte (mom). Every gift she gives is carefully considered and tailored to the recipient. Once, my mom had to intervene after my sister gave away her entire piggy bank to one of her friends on a whim.
When it comes to generosity, if my sister were a fictional character, she would be a Disney princess.
Me? I would be Smaug.
In The Hobbit, Smaug is a dragon guarding his hoard of gold. Smaug is described as “a most specially greedy, strong and wicked worm.” I wouldn’t go so far as to call myself those things, but the point is that I had a hard time giving up any of my hard-earned gold.
The habit of saying ‘No’ built up slowly. First, I started getting calls from my alma mater not a week after I graduated. Coworkers would walk around the office passing a hat for donations to a local charity. Cashiers would ask if I would like to round up my order to donate.
No, no, no.
Every single day while working in downtown Portland, people in red vests would block my path as I walked to the food carts, asking if I cared about the environment. I answered with a brisk “No,” and stepped around them.
Of course, it’s not that I don’t actually care about the environment, but every day there was a consistent onslaught of people asking. Each “No,” stacked on itself as a type of armor, like scales on a dragon’s back. I would much rather sit down, make a giving plan, and donate to the causes I care about. Until then the easy answer was “No.”
In high school, I volunteered time with Key Club and my local youth group. I figured that giving money would come later when I was an adult with a real job. Later, when I was more financially secure. Later, when I had time to figure out the causes I want to give to.
Later was so far in the future, I didn’t think about it. Suddenly, I’m realizing that later is now.
Everyone wants to make an impact on the world around them. They want their work to matter. Many people build giving into their lives, by setting aside portions of their paycheck or setting a line item in their budget for giving freely. It’s time for me to stop defaulting to “No,” and start saying yes.
Should I Open A Donor Advised Fund?
Many experts recommend opening a Donor Advised Fund (DAF) for giving. A DAF is a charitable investment account donors use to contribute money, receive tax deductions, and write grants. I planned to open a DAF for myself and write a post with the steps of how to do it. However, as I researched more I realized that for the average person, a DAF might not be beneficial.
The Pros of a Donor Advised Fund
- A DAF is a great way to do a lot of up-front giving. If you can anticipate multiple years of giving and lump it into one year, you can put it all in the DAF to get a larger one-time tax break, then make your charitable donations from the fund in the following years.
Alternative Methods of Giving
- You can donate stocks and securities that have appreciated in value.
- The DAF provides a single receipt to file with the IRS for all of your giving.
Standard vs. Itemized Deductions: What Do They Mean?
There are two ways to claim deductions annually:
- Taxpayers can claim a standard deduction ($12,200 for individuals, $24,400 for couples filing jointly in 2019) without needing to provide a single receipt.
- However, if they have tax-deductible expenses that exceed that amount (mortgage interest, charitable deductions, certain medical expenses, etc.) then they can itemize their deductions to claim a larger tax break.
You get a tax break from charitable giving whether or not your money comes from a Donor Advised Fund. The single most important benefit of the Donor Advised Fund is the timing because it allows you to lump all your giving into one year in order to exceed the standard deduction threshold. For example, suppose you know over the next five years you want to donate $30,000. If you have the means to donate it all upfront, you can receive your tax break and then dole out your charitable donations over the next five years.
The Tax Foundation estimates that 90% of people will take the standard deduction over the itemized deduction in 2019, which means that 90% of people will not likely see a tax benefit from opening a DAF.
Who Benefits From A Donor Advised Fund?
You will likely benefit from a DAF if you are:
- A high earner planning to retire early, so you take advantage of the tax benefits before retiring, then give generously in your low-wage years.
- High earner(s) who can donate over the standard deduction threshold and want an easy way to track all of your giving.
- An entrepreneur at a start-up that made it big and want to donate some of your appreciated stock.
I considered opening a DAF anyway, even though I wouldn’t get the tax benefit. The single receipt for all charitable contributions sounded great, and the fact that I could invest the money and conveniently allocate the money to different charities appealed to me. However, when I researched further, I realized that using a DAF also has some drawbacks.
The Cons of a Donor Advised Fund
- Fidelity and Vanguard both charge donors a 0.6% annual fee (or $100, whichever is greater) on the first $500,000 in the account. Other DAF providers have similar fees.
- The money you contribute to a DAF can be invested into mutual funds, which also have management and other fees.
In contrast, I invest most of my money in index funds with fees as low as 0.04%.
The minimum contribution
- Donor Advised Funds require a minimum contribution. Fidelity has a minimum contribution of $5,000, whereas Vanguard requires $25,000 to open an account.
The contribution is irrevocable
- Once you donate to your DAF, you can’t take it out for any reason. It can only be given as charitable donations to registered organizations.
I was prepared to irrevocably drop $5,000 in an account. Considering my terrible track record for giving, it would be great to have a completely separate fund set aside for charity. I could do that.
However, the fact that fees would eat away at the money in the account, I wouldn’t hit the standard deduction limit, AND I’m not a hotshot start-up success story meant that a Donor Advised Fund was not for me.
For people like me who won’t get that juicy tax benefit from donating large amounts to charity, there are simpler ways to donate.
Opening a Separate Giving Account
For a single person who doesn’t have $12,200 to donate up front, it is more effectual to invest the money in a low-cost index or bond fund. Even more simply, creating a separate savings or checking account for giving is a great start.
I’m starting by diverting $100 a month to a separate savings account. In Ally, my preferred bank, it’s easy to open a new account and give it a nickname. Then, I can donate from the account using checks, a debit card, or by hooking it up to PayPal.
I called my account “The Philanthropy Project” and will pick a charity every month—you will start to see it on my monthly expense report.
This is a way to ease into giving. $100 is a rather arbitrary number meant to get the giving going. I can always increase or decrease the amount depending on saving goals.
Investing In Causes I Care About
It’s hard to let go of money I could invest in my future instead. In 40 years time, that $100 a month could grow to over $240,000. That’s a lot of money towards retirement, but it’s not a good reason to hoard. Instead of my legacy modeling after a ‘most specially greedy, strong and wicked worm’ I hope to be remembered as a ‘most specially generous, strong, and kind dragon.’
My first contribution this month is towards the American Civil Liberties Union.
Their mission as outlined on their site:
- Protecting free speech and the right to protest
- Defending reproductive freedom
- Fighting anti-LGBT discrimination
- Safeguarding the rights of refugees and immigrants
I believe in each of these things, but I wasn’t doing anything about it before. I could speak my mind and hold an opinion, but my actions had no influence on how anything would turn out. However, when I donate, I put my money where my mouth is. I align my spending with my values.
I’m investing in causes I care about. I might not see the exponential curve of monetary growth, but hopefully the money has its own exponential impact on the world.
What about you?
Do you have a giving plan?
Are you a Smaug or a Disney Princess?
Do you ever struggle with your giving?
Share in the comments below!