In the spirit of the holiday season, today I’m discussing how and why Mr. Frugalwoods and I make charitable donations. First, permit me to set the scene. Mr. FW and I consider ourselves to be very fortunate. And among our many, many blessings (which I enumerate here) is our wealth. Although we’re not rich by the standards of Wall Street or corporate CEOs, we’re well off. We’ve grown our wealth by saving exceedingly high percentages (circa 70-82%) of our income every year and investing these savings in low-fee index funds and a revenue-generating rental property.
Through our savings, we’ve enabled a move to our dream home on 66 acres in the woods of Vermont. Through our savings, I was able to quit my day job and instead pursue a career I adore–writing for you fine people–from home. Through our savings, we’re able to stay home and care for our daughter full-time (and Frugal Hound too, of course). Through our savings, we’ve built a nest egg we could live off of for the rest of our lives. But all of that is another story for another time.
What I want to talk about today is the desire–and I’d even say the requirement–that Mr. FW and I feel to give back. Sure, we’ve made some smart decisions about our money and sure, we’ve made some sacrifices, but our efforts pale in comparison to the hardships faced by those less fortunate than us. We don’t feel that we deserve all the credit for the money we have, and so, we share it. Additionally, we want to teach our daughter from a young age to give back, which I think is a lesson best learned by example. It’s an example both of our parents set, and their demonstrations of generosity resonate with us to this day.
Previously, I’ve discussed our privilege in depth as well as my philosophy of living out compassion in a world of judgement. One of the ways that we live out our compassion is through philanthropy. Mr. FW and I both give of our time through volunteer work in our local community, but there’s truly no substitute for donating cold hard cash. For that reason, we choose to give of both our time and our financial resources.
While giving away money might seem anathema to frugality, I actually think it’s a wonderful benefit of living a frugal life. If Mr. FW and I didn’t adhere to a lifestyle of extreme frugality, there’s a lot we wouldn’t be able to do–and charitable giving is one of those things. I think of it as a fulfilling aspect of life for those of us circumspect with our personal resources.
How We Give: A Donor Advised Fund
Let me first address the mechanics of our giving: Mr. FW and I have a Donor Advised Fund through Fidelity. A Donor Advised Fund (or DAF) is essentially a tax-advantaged way of making philanthropic gifts. Here’s how it works: you put the amount you want into your DAF and you receive a tax deduction for the full amount in that calendar year. Then, you make allocations from your DAF to nonprofits over the course of as many years as you choose. The money in your DAF may only be used for philanthropic contributions, but you get to choose the nonprofits you support. Another note with a DAF is that you can’t use the funds for a donation where goods or services are received. For example, you can’t make a grant from a DAF to cover your ticket to a nonprofit’s gala event.
There are several advantages to utilizing a Donor Advised Fund:
1) If you contribute to a DAF in a high tax year, you’ll reduce your taxable income for that year. This is due to the fact that you receive the deduction for your full contribution amount in the calendar year you put money into the DAF–not when you make allocations to charities from the DAF.
2) It’s a way of strategically mapping out your philanthropy, because you’re setting aside a chunk of money earmarked exclusively for charitable contributions. You can’t do anything else with that money, so you’re ensuring you’ll remember to be a philanthropist every year.
3) The money in a DAF is invested, which means it’ll grow tax-free over the years. Hooray! Hence, you can plan to contribute the spin-off from the DAF’s investments each year. This way, you can ensure you’ll be able to contribute to nonprofits you care about for decades to come. Our goal through our DAF is to sustain our philanthropy for the longterm.
4) You can contribute assets and/or cash to a DAF, which is another excellent tax advantage. Mr. FW and I contributed our most appreciated assets, which in our case, were index funds we’d purchased in 2009. Hence, they’d seen robust appreciation and had we sold them, we would’ve owed a great deal in taxes. By instead contributing them to our DAF, we were able to skip realizing those capital gains taxes and instead deducted the full market value of the securities from our taxes this calendar year. In short, you’re able to avoid paying taxes on appreciation through donating to a DAF and, you become a philanthropist in the process. It doesn’t get any better than that!
To further illustrate the awesome advantage I outline in #4, here’s a hypothetical scenario:
Fred and Franny Frugal donate $50K to a DAF in a year where their federal marginal rate is 28% and their state marginal rate is 8.8%. The $50K is comprised of longterm appreciated stock with a cost basis of $30K, which means it has $20K of longterm capital gains.
Here are the tax savings they’ll realize from this donation:
Savings of a $50K deduction: $18,400
+ Savings of not paying longterm capital gains tax: $3,000
= Total tax savings: $21,400
(please note: this is somewhat simplified and should not be taken as tax advice)
By donating $50K in one year, Fred and Franny are maximizing their tax benefits. This is doubly true if they predict they may have low marginal tax rates in the future.
We chose to open our DAF through Fidelity for several reasons (by the way, Fidelity isn’t paying me to tell you this, although I kind of wish they were… ):
- It costs nothing to open and there’s no minimum balance requirement.
- The minimum amount required to open a DAF is just $5,000.
- Fidelity’s annual administrative fee for managing DAFs is quite low: $100 or 0.6% of assets under management, whichever is greater.
- It’s basically the low-fee index fund of the charitable giving sphere, and in fact, you can choose to have your DAF invested in low-fee index funds!
- They have an easy-to-use online interface and, all of our other accounts are already through Fidelity, which made the whole process even easier.
- They are lovely and very helpful over the phone, should you have questions (which I did).
Where We Give: Strategic Philanthropy
I’m going to share a secret: I worked as a nonprofit fundraiser for ten years before deciding my true calling was writing about personal finance. I tell you this so that you understand the basis for my philosophy. I’ve been on both sides of a solicitation and so the perspective I share is somewhat unique (of course, not unique for all my fellow fundraisers reading this, of which I know there are many!).
Another aspect undergirding my philanthropy is the efficiency doctrine that Mr. FW and I live by. Ok, it’s not really a doctrine, it’s just that we like to approach all things with an analytical lens and an eye towards efficiency.
We Give To Small Institutions
These two factors form the basis for our primary decision as philanthropists: we give to small organizations.
As someone who has raised money for large and small institutions, I can tell you that your small dollar gift (by which I mean anything under a single gift of $25,000) will go significantly farther at a small organization. There are many incredible large nonprofits doing the literal work of God, but a $100 or even $1,000 check is simply a drop in the bucket for them. Their fundraising resources are far better spent on pursuing more substantial gifts–I’m talking the $1 million+ category. I wish I had that much money to give away annually, but alas, it ain’t so.
For the amount that I do have to contribute each year, I prefer giving to organizations with budgets under $500,000, which is a pretty darn low annual operating budget. I can be relatively assured that my level of support will make actionable change in a budget that small.
If you’re wondering how to assess a nonprofit’s budget, you can ask them for a copy of their annual report, which might also be available on their website. However if, like me, you support organizations too small to supply an annual report, you can simply check out their Form 990 through Charity Navigator, or by googling. All 501(c)(3)s (that’s the IRS tax identifier for a nonprofit organization), except for churches, are required to fill one out every year. Handy!
I love reading 990s (nerd alert) because they inform me not only of an organization’s overall budget, but also how they’re spending their money. Does their CEO have a gigantic salary? Or are they funneling most of their resources into serving their constituency? I think it’s incumbent upon donors to learn as much as they can about nonprofits before supporting them. I also don’t expect small nonprofits to aggressively steward or solicit me–that takes precious resources I’d rather they direct towards serving their mission. I’m happy to do my own research and determine my own giving timeline and priorities.
We Give Locally
Another tenet of our philanthropy is that we give hyper-locally. Our rationale for this is simply that we love our new community, we love our adopted home state, and we want to be a force for good to the extent that we’re able. For that reason, we’ve decided to support local organizations only.
We Give To Our Priorities
I think it’s important to support the things you’re most passionate about. Renowned philanthropists have transformed the landscape of fields such as health, education, and the arts simply by focusing their contributions. I see nothing wrong with supporting what matters most to you–and in fact, I think it makes for a more committed philanthropist.
To that end, since there are two people making the giving decisions here at Frugalwoods HQ, we decided to support several organizations we mutually agree on and then each choose an organization that’s of especial concern.
The Organizations We’ll Support in 2017
My choice: One of my passions is helping women in need–be it providing access to healthcare or fostering programs that empower women–that’s my thing. And so, I selected a local organization that provides resources for women who are victims of domestic violence.
His choice: Mr. FW selected a local nonprofit news organization that conducts investigative journalism into issues affecting Vermonters. As firm believers in the importance of unbiased journalism to strengthen our democracy, this is a local institution whose work we want to foster.
Our choice: Together, we decided to support our church and our town’s community center (which provides a free summer camp for kids, lunches for seniors, town dinners and festivals, scholarships for local kids, and more). We’re also deviating slightly from our otherwise hyper-local, hyper-small guidelines in order to be members of our state’s NPR station, Vermont Public Radio. We listen to VPR every single day and their news coverage is indispensable to us. I just have to support NPR!
Sidenote: I should also note that Mr. FW and I make small gifts throughout the year to such things as local chicken dinner fundraisers, friends’ causes/runs/events, the giving tree at church, etc. We don’t make these grants from our DAF since they’re typically cash or in-kind donations. We also don’t apply our rigorous vetting process of reviewing 990s and determining strategic amounts. We just buy the chicken dinner and don’t worry about it.
We Make A Few Larger Gifts
As you’ll note, we’re only making gifts to five organizations. It’s our belief that making several larger donations has a greater impact as it concentrates our resources. Plus, nonprofits incur costs surrounding each donation they receive. Staff are required to process a gift, write a tax acknowledgement letter, enter the donation into a database, allocate the donation, report it on their 990, steward the gift, and then re-solicit the donation next year.
Knowing the inner machinations of fundraising like I do, I prefer to limit the staff resources required to handle my contributions. Giving through a DAF is another way to lessen this burden on nonprofits: since the tax deduction for the gift has already been received by the donor (in the year the DAF was funded), nonprofits aren’t required to send acknowledgment letters for gifts received through DAFs.
I’m all for reducing the paperwork and labor for already over-burdened nonprofit staffs. I don’t need to be excessively thanked for my giving–I just want my money to go to work serving the constituency I’m supporting.
As a former fundraiser, I can tell you that the most wonderful financial gift a nonprofit can ever hope to receive is an unrestricted gift. An unrestricted gift is one that’s given with no requirements and no strings attached. The recipient organization can then use the money where it is most needed. Although it’s tempting to give a gift for a specific purpose, unrestricted gifts are what keep the lights on and the employees employed. Without them, nonprofits wouldn’t exist. Hence, all of our gifts are unrestricted.
A critical element of determining a level of support for each of our chosen organizations is knowing what amount we’ll be able to give year after year. It’s tough for an institution–and particularly a small one–if you give them $10,000 one year and $0 the next. Many nonprofits build their budgets and goals based on the prior year’s dollars raised and so eliminating a gift entirely is challenging for an organization.
In my opinion, it’s better to give an institution $1,000 every year, and have the ability to sustain your support for decades. An exception here is participation in a capital campaign where an organization is working to raise a large amount of money in a short period of time in order to facilitate a major project, such as refurbishing a building.
Give At The Same Time Every Year
Making grant allocations from your DAF, or writing out checks, at the same time every year will ensure that you consistently support the organizations you care about. Many people choose the end of the calendar year for their giving, which is perfectly fine. Others align their giving with a nonprofit’s fiscal year, which–fun fact–often does not coincide with the calendar year.
It doesn’t really matter when you give during the year, the key is that you do give each year. Making all of your philanthropic gifts at once also ensures you’re allocating your funds most efficiently–it enables you to strategically plan the total amount you want to give away in a year and identify all of your recipient organizations at once.
Take The Tax Deduction
If you’re using a DAF, your tax deduction comes when you fund your DAF, not when you make your allocations to nonprofits. If you give directly to nonprofits, they’ll issue you a tax acknowledgment letter that you can use to deduct the gift from your taxes. Prior to opening our DAF, I kept a paper file of all acknowledgement letters.
Should I Be Philanthropic If I’m In Debt?
This is a question I’ve had a number of readers ask and, although there’s no blanket answer for everyone and every situation, I usually say no. When you’re in debt (I’m not talking about having a mortgage, I’m talking about a student loan, car loan, or consumer debt), you have a pants-on-fire financial situation. You’re losing money every single month to the interest on your debt and you won’t be able to elevate your savings–or truly plan for your future–until you’re out of debt.
Furthermore, when you’re in debt and when you don’t have a sufficient emergency fund or savings, you’re on the brink of crisis–a lost job, or illness, or unexpected home repair could push you over the edge financially. You need to put on your own oxygen mask first in this situation. Then, once your debt is eliminated, you can focus on doing the things you want with your money, such as charitable giving.
Reflect And Create Your Own Giving Philosophy
While Mr. FW and I like to give based on the above parameters, your own personal philanthropy profile may be profoundly different. And that’s OK! There are plenty of avenues for giving that I didn’t address here, such as including a nonprofit in your will. And there are millions of worthy organizations out there with mission statements that range from the global to the hyper-local. Find your passion, find your cause, organize your finances, and become a philanthropist.