Think strategic philanthropy is just for billionaires? Heck no! It’s for everyone who gives away money. We’re all some strategic bosses with our spending, savings, and investments–charitable giving is absolutely no different. Today we’re going to discuss opportunities to maximize your philanthropic impact, support charities you believe in, and ultimately, make wise financial decisions that’ll benefit others–in other words, how to donate like a billionaire! What could be better? Cookies maybe, although I did eat a lot of cookies while writing this, so maybe that brings it full circle?
Philanthropic giving is something Mr. Frugalwoods and I consider central to our philosophy on money and one reason why we feel called to manage our finances so prudently. Plus, before becoming a full-time writer, I worked for ten years as a fundraiser for a number of different nonprofit organizations in Cambridge, MA, New York, NY, and Washington, DC.
Suffice it to say, between raising money for charities and now writing about money for a living, I think about charitable giving a lot! It’s the point on my own personal Venn diagram where my past and current lives intersect. So you could say I’m a tad passionate about this topic…
While it’s easy to give away money just because it feels good or just because you want to, I’m an advocate of strategic philanthropy. Sounds super fancy, no? I do like being fancy (over here with my uncombed hair and hand-me-down maternity clothes… ). But seriously, I like to be thoughtful and considered in all decisions related to my money, and donating to charity is just one more thing I do with my money.
Donor Advised Funds
Many billionaires donate through private foundations and a Donor Advised Fund is a lot like having your very own private foundation, but without all the administrative and tax burdens, and with many of the benefits!
Last year I wrote an extensive overview of Donor Advised Funds in How We Make Meaningful And Tax Efficient Charitable Donations, so I won’t belabor the point. But of course it’s me so I can’t resist giving you just a teensy tiny overview of what they are because, in many ways, my Donor Advised Fund is the cornerstone of my strategic philanthropy.
Donor Advised Funds (abbreviated as DAFs) are a tax-advantaged way to make charitable gifts. Anyone can open a DAF and you can do so online, just like any other element of online banking. You put money into a DAF and then the DAF makes grants (aka gifts) to nonprofits of your choosing either in your name or anonymously. The nonprofits’ experience is essentially the same whether they receive a gift directly from you or from you via your DAF.
Mr. Frugalwoods and I started a Donor Advised Fund last year for a number of reasons:
- Reduce your tax burden. You (the donor) are able to take a tax deduction for the full dollar amount you put into your DAF in the calendar year you decide to put money in your DAF. Then, you’re able to make gifts out of your DAF in perpetuity. There’s no requirement or need to give away all of the money in your DAF in a single year; rather, you can mete your giving out over as many years as you want, which allows you to strategically plan your philanthropy for your lifetime. You can also add more money to your DAF at any time. This is particularly advantageous for anyone experiencing a high tax year that they anticipate will be followed by lower tax years (so, anyone who is retiring or expecting a dramatic reduction in salary in future years).
- Your philanthropic dollars grow tax-free. This is perhaps the coolest part! You can choose for your DAF to be invested in the stock market, where it’ll grow tax-free (unlike in regular investments, where gains are taxed). Hence, you’ll end up with more money overall to donate to charity! Win.
- Avoid capital gains taxes. You can contribute appreciated securities (aka stocks) to a DAF and not pay taxes on any appreciation those stocks have experienced. We donated our oldest stocks (the ones that’d seen the most appreciation) to our DAF, which means the full dollar amount will go to charity instead of to taxes.
Enable longterm philanthropic planning. The money you contribute to a DAF cannot be used for any purpose other than charitable donations. You can’t transfer money back out of the DAF and you can’t do anything with it other than donate it. So don’t put money into a DAF that you’re going to need! It’s not an investment vehicle, but rather a means of mapping out your longterm charitable giving. For Mr. FW and me, we like having money in a DAF because it ensures we donate to charity every year and that we’re thoughtful about what percentage of our net worth we give away. Since our DAF is invested in low-fee index funds, which is how I recommend investing, we anticipate it will grow over time and yield a sustainable annual rate of withdrawal for charitable giving. We also plan to add more money to our DAF this calendar year.
- Less administrative burden on nonprofits. Having worked as a fundraiser and having processed gifts for many, many, many years, I can tell you that receiving a gift from a DAF is administratively easier on a nonprofit as they’re not required to issue you a tax receipt for your gift. Since the tax deduction is taken at the time you put money into your DAF–not at the time you make a donation–the nonprofit doesn’t bear the burden of issuing you a tax receipt. Additionally, if you’re giving mostly to smaller nonprofits, a DAF allows you to make gifts of appreciated stock to organizations that likely wouldn’t be able to accept these types of gifts otherwise. Accepting gifts of stock directly can be challenging for nonprofits that lack a robust fundraising staff and so utilizing a DAF is a great way to give appreciated stock to smaller institutions.
Tax bill caveat: who knows what will happen with the impending new tax bill, but it seems that the current proposed tax bill might make it unlikely that folks will itemize in the future. Itemizing is the only way to realize a tax break with charitable giving. Given this, it might make sense to fund a DAF this year in order to take the tax advantage now and fund your charitable giving for years to come.
There are some other parameters around Donor Advised Funds that you should be aware of before you open one, all of which I outline in last year’s post on the topic. And, for reference Mr. FW and I have our DAF through Fidelity because their fees are low, they allow you to invest your DAF in low-fee index funds, and we have all of our other accounts through Fidelity, so it’s just easier for us.
Concentrate Your Giving
Now that we’ve established one avenue for how to donate, let’s talk about where to donate. I’m a big fan of concentrated giving, by which I mean donating larger amounts of money to fewer organizations. For example, instead of donating $25 to four different nonprofits, I’m a proponent of donating $100 to one nonprofit. My rationale is that an organization can do a lot more with $100 than they can with $25 and the heart of strategic philanthropy is knowing what you most want to support and not frittering away your donations in small increments. For this reason, I’m also in favor of donating to smaller institutions versus mammoth nonprofits. I have no beef with large nonprofits–the Salvation Armies and United Ways of the world–as they do truly astounding work. However, I am cognizant of what percentage of their total annual operating budget my contribution comprises.
In the case of the United Way, their revenue for last fiscal year was a staggering $3.9 billion, which is awesome! But no dollar amount I’m able to contribute will ever come close to an actionable percentage of this overall total. And yes, I do understand the power of small dollar fundraising and I do know that many small gifts equal a large total. However. What I’ve decided in my personal philanthropy is that I want to concentrate my giving at small, local institutions for the simple fact that they need my money more. For comparison, one of the local organizations Mr. FW and I support every year reported revenue of just over $300,000 for the last fiscal year. That’s a pretty vast departure from $3.93 billion and it’s a dollar amount that I feel my gift can actually impact.
There is no wrong way to donate to charity and there’s absolutely nothing wrong with supporting large nonprofits. It’s a question of having the awareness of what an institution’s overall annual operating costs are and how your support might fit in with that broader dollar amount. If you’re curious about the budgets of your favorite nonprofits, you are in luck because every single 501(c)(3) (that’s the tax code for a tax-exempt nonprofit organization) with gross revenues over $50,000 is required to fill out a Form 990 with the IRS, which lists all of their financial info. Many nonprofits also issue annual reports, which present this information in a lovely, easy-to-read format. Just google around and you’re likely to find what you need for any nonprofit you’re considering making a gift to. I also choose to give locally as my rural community has quite a few needs and I’m happy to keep my dollars within the local economy. This, again, is a personal choice, but it’s something to consider when crafting your own strategic philanthropic plan, which brings me to…
Give ONLY To What Matters Most To You
Sound familiar? It’s a riff on my repeated mantra to “spend money only on what matters most to you.” Well, the exact same mentality applies to charitable giving. Concentrating my giving and giving locally are examples of how Mr. FW and I give to what matters most to us. I think this is the most crucial element of strategic philanthropy. While it sounds obvious to support what you care most about, in the past, my philanthropy was a lot like my pre-frugality spending: unfocused, unregulated, and not always in service of my highest and best priorities.
To facilitate this, Mr. FW and I like to sit down together every year and map out the organizations we feel the most impassioned to support. Otherwise, it’s easy to get sucked into writing a $10 check to every single nonprofit that just so happens to send you a solicitation through the mail. It’s tough because (almost) every nonprofit is doing amazing work, serving an underserved population, turning people’s lives around, and making the world a better place! We should support them all!
But wait. Think about the largest philanthropic donors out there–The Bill and Melinda Gates Foundation, The Rockefeller Foundation, and the like–these people are freaking strategic about their giving. They don’t give to every nonprofit because they can’t. Even billionaires concentrate and focus their giving on the things that matter most to them. You don’t see them doling out $100 to every nonprofit in the country because that would diffuse and minimize their impact. Instead, they give HUGE grants to a smaller number of organizations in order to have outsized impact. They are transformational donors because of their focus and concentration of their resources. You can do the same thing, albeit on a smaller scale. Here again, the smaller the nonprofit, the larger the impact of your financial support.
These foundations operate under the auspices of mission statements that articulate their giving priorities. You too–yes you!!!–can have your own personal giving mission statement. Just like you track your spending and only buy things that truly matter to you, you should take the same approach with your charitable giving. There’s a misconception that strategic philanthropy or Donor Advised Funds or thoughtful giving are only for the billionaires of the world, but that’s like saying that investing in the stock market is only for billionaires (newsflash: it is decidedly not). Folks, we can all take a page out of billionaires’ checkbooks and be focused and intentional in our giving.
In considering where you want your charitable dollars to go, ask yourself:
- What causes are most important to me? (Hint: these are the things that make your blood boil or bring tears to your eyes or otherwise increase your heart rate when you think about them. Identify what matters most to you and then support it with your dollars.)
- What organizations in my community do I see making actionable differences in the lives of those in need? (Hint: you want your gift to be used wisely, so look for organizations with demonstrated patterns of success and impact. Reading a nonprofit’s annual report is a good place to start.)
- What organizations are in the most dire need of my financial support? (Hint: check out the overall budgets of nonprofits you’re considering supporting. Who is in most dire need of additional funding?)
After going through these questions, consider crafting a brief mission statement about what you want your philanthropy to look like.
In addition to concentrating their giving and focusing on their priorities, billionaires are often what I like to call ‘repeat offenders.’ In other words, they often donate very similar dollar amounts (with considerations for inflation) to the same nonprofits for years, if not decades. The reason for this is that if the donor is happy with the work of the nonprofit, they might as well continue supporting it!
From a strategic standpoint, these recurring donations are LITERAL GOLD for nonprofits as they are how these organizations devise their budgets and plan their programs from year to year. Smaller nonprofits especially become dependent on these repeated donations and can flounder significantly if support is revoked. This isn’t to say you should continue supporting an institution that’s mismanaging donations or not living up to its mission, but rather, that you should determine giving dollar amounts based on what you can reasonably expect to donate year after year. This is yet another reason to concentrate and focus your giving. It’s also another advantage of giving through a DAF–you can map out and predict the return on your DAF’s investments and then determine the tenable rate of withdrawal for contributions every year.
This is why I prefer to give, for example, $5,000 every year to an institution as opposed to $50,000 all in one year and then never give them a gift again. A single gift of $50,000–especially with no accompanying explanation–that’s never going to happen again can wreck havoc on a nonprofit’s ability to plan. Conversely, if a nonprofit knows they can expect your $5,000 every single year, they are able to create longterm plans and goals based on the assumption of this dollar amount.
Parallel to giving to the same organizations is the importance of giving at the same time every year. As a fundraiser, I can tell you that we’d enter spasms of panic when a major donor’s gift was late. We wondered if they’d forgotten or decided not to give or were mad at us. We’d then enter round after round of discussions on how and whether we should check-in with the donor, who should have the conversation, how we could be polite, discreet, but also come away with intel… Don’t do this to nonprofits. Give at the same time every year. It doesn’t really matter when this time is–some folks choose the calendar year end or the fiscal year end or a random month–all that matters is that you do it at the same time every year.
How Should Partners and Families Determine Giving Priorities?
If you have a partner, and especially if you have combined finances, it’s important to make your charitable giving decisions together–just as you make all other financial decisions together. The way Mr. FW and I do this is that we discuss the organizations we’d like to both support and then we each pick an organization that’s a personal priority.
In this way, we make gifts together, but we’re also able to select a nonprofit of our choosing that the other person doesn’t need to feel impassioned about. It’s ok to deviate in your philanthropic goals and in fact, creates a more interesting partnership all around!
Mr. FW and I support just five organizations annually–three of them jointly–and then one organization each on our own. Technically, all of our giving is joint since our accounts are combined and the DAF is in both of our names, but the idea is that we’re each able to choose our own nonprofit to support every year.
As our daughters get older (they’re currently WAY too young for this at age two and due in February… ), we plan to incorporate them into our philanthropy so that they can learn how to craft their own charitable giving plans and choose organizations that matter to them.
Our Giving Slush Fund
While I’m all “strategic philanthropy” and giving through my DAF and whatnot, I also give random dollar amounts to random things at random times of the year just because I want to. Friends’ charity races and Go Fund Me pages and chicken dinner fundraisers for our volunteer fire department and the Angel Tree (Christmas gifts for children in need) at our church are but a few examples of things I donate to out of what I term our “giving slush fund.” And by “giving slush fund,” I mean that I have literally no idea how much money we give to these types of things over the course of the year and I don’t care either.
Often these are events or fundraisers that I cannot donate to using my DAF since money from a DAF cannot be contributed towards anything you receive a ‘good or service’ in return for. So, the chicken dinner, in which I received a delicious chicken dinner, cannot be donated to through my DAF since the dinner is considered by the IRS to be a ‘good or service.’ And I can’t exactly use my DAF to buy toys and clothes for my Christmas Angel Tree kid, so, I don’t sweat it. While I’m all for strategically mapping out the bulk of our charitable gifts, we don’t quibble over these more nominal amounts. I think it’s important to allow for these one-off giving opportunities that crop up every year and to simply contribute an amount that makes sense for you, while knowing that the majority of your philanthropy takes place in a more organized, strategic fashion.
Should I Give Away Money If I’m In Debt?
This is a question I get from readers quite often, so I know it’s one that weighs heavily on many of your minds. I need to preface my advice with the caveat that since Mr. FW and I have never been in debt, I don’t speak from personal experience. However, I do speak as someone who helps a great many people with their finances and who raised money for nonprofits for a decade.
First of all, what do I mean by debt? I mean non-mortgage, high-interest rate debt. If you’re cruising along with a low-interest rate mortgage, I’m not talking about you. I’m talking about high-interest rate student loan or car or consumer debt. This is debt you both want and NEED to pay down. Every month that you don’t pay off this debt, your interest on that debt is growing and you’re owning your lender ever larger amounts of money. It’s my opinion that you need to pay this debt off. As fast as possible. And that might mean forgoing making charitable gifts until your debt is gone. By donating money while in debt, you’re essentially digging yourself deeper and deeper into debt and doing a great disservice to your longterm financial health and your longterm ability to contribute to charities.
I understand that this is likely a controversial stance and everyone has to make a decision that feels right to them, but, it doesn’t make sense (from a mathematical or fiscal prudence standpoint) to donate money to other people if you yourself lack an emergency fund and the ability to care for your own family in the event of a crisis. If you feel you must donate money while in debt, consider scaling back the total amount you give away until after you’re out of debt.
I know that a major sticking point for many folks is the calling they have to tithe to their religious institutions. And I get it. I donate to my church every year and they need the money! But it’s a slippery slope to give away money you don’t have and when you’re in debt, it’s really not your money you’re giving away. You’re choosing to slide further and further into debt in order to donate. Get yourself out of debt and have charitable giving as a goal for your debt-free lifestyle. Use it as motivation to pay down your debt even faster. Rather than looking forward to an ultimately empty and meaningless shopping spree post-debt, look forward to writing a fat check to your favorite charity. In my opinion, it’s a ‘put on your own oxygen mask first’ situation and you are the person who needs their oxygen mask. You need to get your own financial house in order before you can start helping out other people with their houses. Most charities, from a strategic standpoint, would prefer that you’re a responsible, continuous donor throughout your lifetime as opposed to a sporadic, one-time donor who is giving at the potential peril of your own well-being (see my above section ‘Give Consistently’).
The good news is that there are MANY ways to give back to nonprofits other than financially. If you are in debt, or struggling to get an emergency fund together, or otherwise not financially solvent enough to give away money–in which there is ZERO shame–find another way to contribute. One solution is to make…
Gifts Of Time And Service
What do nonprofits need other than money? Your time! They need you to volunteer! They need you to stuff envelopes, edit newsletters, babysit babies during church (thank GOD for these people!!!), bake cookies, bring dinners to seniors, shovel snow off the front steps, fix the boiler, dig a trench to fix the insulation problems with a water well (can you tell some of these examples stem from personal experience 😉 ?), change the lightbulbs… the list of needs is literally endless, especially for small, local nonprofits. So don’t feel discouraged or depressed if you can’t contribute money this year (or next year or the next year).
Similar to giving money, the best way to give of your time and service is to focus your efforts. As a person who used to help manage volunteers, I can tell you that nonprofits incur a not insignificant cost when they manage and train volunteers. For example, say you have five hours a week to volunteer. If you volunteer for one hour at five different nonprofits, you’re dramatically diluting your impact and, I’m sorry to say, are likely a net negative for the nonprofits (given the costs and staff time required to train/manage you). Conversely, if you volunteer five hours a week at the same nonprofit, you’re likely to produce a net positive for them. You can do a TON of work in five hours a week and, if a nonprofit knows they can count on you week after week, you’re as good as a part-time employee to them. You are having a strategic and meaningful impact on their operations.
In selecting a volunteer opportunity, do what you can and sign-up for a volunteer task suited to your current status in life. As a parent of a young child (with another on the way), my own business (of which Mr. FW and I are the sole ’employees’), and a book coming out in March, my time is what you might charitably called stretched at the moment. Mr. FW serves on the boards of two different local nonprofits and we work hard to accommodate the late-evening meetings that this entails. We decided that to have me also going to late-evening meetings is simply not tenable for our family right now. Rather than wring my hands about this, I’ve discovered that I can do volunteer work from home on my computer! Editing newsletters, creating fliers and brochures, etc–these are my specialty right now as I can do them with Babywoods in my lap (or snuggled in her bed). Plus, these are all things I already know how to do. Find something that you can do, that fits with your schedule and skill set, and then do it consistently.
Make A Charitable Giving Plan That Works For You
As with all things financial, there’s no one right answer for how to donate money, but what I do advise is that you implement a rationale and a strategy around what you do. Don’t be writing random checks to random organizations at random times that you don’t even know the mission statement or annual operating budget of. Be focused and intentional. Choose to donate specific amounts of money to specific nonprofits performing work that’s meaningful to you personally and to your community.
Perhaps that means concentrating your money locally. Perhaps it means concentrating your money on disaster zones globally. Perhaps it means opening a Donor Advised Fund. Perhaps it means simply creating a spreadsheet listing out how much money you have to give away this year and all of the organizations you want to give to. Perhaps it means making a conscious decision to not give away money this year and to instead pay down your debt while upping your volunteer game and getting involved in a hands-on sort of way. Being strategic about philanthropy is not just for the billionaires of the world, it’s for everyone who gives away money. Do what works for you, do what matters to you, but be thoughtful and strategic about it–you will not regret it and you’ll feel so good about supporting institutions for which you care deeply.
P.P.S. We’re taking my Uber Frugal Month Challenge as a group during the month of January 2018! To save more money than you ever thought possible and transform your relationship with your finances, sign-up to join us. Also note that the Uber Frugal Month will go on hiatus after January, so now’s your chance!