Two of the most challenging things about giving are determining how much you should give and how much you can afford to give. Sure, Warren Buffet is giving away 99% of his wealth, but he has a crazy amount to begin with! You and I need to eat. (Note that there are some great letters on the Giving Pledge site, which are well worth checking out).
Obviously, how much you can give depends upon how much you have. Less obviously, it also depends upon how much you can leverage your giving. Gifts of time are also valuable, with the National Philanthropic Trust estimating that the average value of each volunteer hour in 2015 was $24. That’s real (although not generally deductible)!
What do others give
Checking out that same NPT page they cite that in 2015 the average high net worth household gave $25,509 to charity while the general population gave an average of $2,520. Wow! Way to go high net worth households! But what exactly classifies as “high net worth”? It’s not hard to believe that this average number is being skewed WAY high by the Mitt Romney’s of the world. It turns out that in this case, “high net worth” households have a net worth greater than $1 million without their primary household or an income in excess of $200,000 per year. Is that you? If not, I hope it will be. But for the purposes of this blog, let’s assume that we are focused on the “general population”.
In the last month I have had three conversations about how much they give. The first one disdained an event I was going to as an event for “people who give thousands of dollars”. Yes. That’s me. (And, apparently, the average giver). The second conversation was with a high income couple that explained how they give “in excess of $300 a year in donations to Goodwill”. The third was with a high income earner (“high net worth” as well by the NPT standard) who said “I don’t give at all. I’m not into that sort of thing.”
Now, I don’t claim anecdote as evidence, although all information can be useful. But what is going on here? I think these individuals believe that their giving is in line with the norm. And I think the average quoted by the NPT is being skewed up by people like me. If I give $12,000 (gross) then I am compensating in the average for four other people who give nothing. Which is fine; it isn’t a competition. It’s just an exercise in figuring out an appropriate baseline for how much to give. But it’s also a data point in line with item 4 in Why Don’t We Give – because others are doing it for us.
How do I calculate my giving
So let’s think for a minute about my claimed donation of $12,000. I’m a personal finance nerd, so I have a tendency to get wrapped up in the details. Is that the number I should I use when I’m determining how much I give? I use tax leveraging in my donations, so the total dollar amount that went to my charities was greater than $20,000. Yet the after-tax (net) cost to me was $2,000. That’s not a big percentage of my (gross or net) income. It’s certainly not even CLOSE to the 10% tithe that some religions request. Hm.
Which brings up another point; should you use gross or net income when determining your gift percentage? Say you want to give 5%. Is that 5% after tax? 5% after tax and retirement contributions? 5% of your net take home pay? These are the kinds of variables that make people throw their hands up in the air when they decide to create a giving plan, regardless of how financially savvy they are. It’s too much! Who has time for such things? Who (besides the Dragon) loves spreadsheets enough to even figure this stuff out?
I’m here for you. It doesn’t have to be that complicated.
Determine your range
I suggest that you estimate a low number and a high number and then pick one in the middle. If at the end of the year you like it, and you’re happy with your contribution, try to give just a smidge more the next year. I’m pretty sure you’ll enjoy the psychological benefits and will be inspired to do more. Because frankly, it’s a little addicting when you are giving to a cause you value and you are getting all kinds of money management juju.
For the lower end of the estimate, I suggest taking your age, multiplying by 7.24, then dividing by the number of children you have.
Really, if you are just starting to investigate this world I suggest a minimum amount of 1% of your gross salary, ignoring any tax credits. If you earn $75,000, your low end could be $750. If you earn $150,000 your low end could be $1,500. Feel free to add volunteer hours into this number. Those are real!
If you’ve been giving for a while then I suggest increasing your prior year contribution by 10% to get to a low end number.
On the high end, I encourage you to think big. But not too big. Sometimes I get carried away with this. There are plenty of effective altruists who advocate giving everything above your minimum standard of living. I am not in favor of this, although I understand the appeal to some personality types. Because I am able to utilize the Colorado CCCC, I set my upper limit as twice my annual state tax bill. If you don’t live in Colorado, this may require a little more tax research before you pick your number. But it will be worth it.
If you want to get a little more complicated, you can take your full taxes into account. This is a great way to maximize your leverage and to give more. For example, you can aim to give 1% of your income on a net annual tax basis. To do this, you compare your tax burden with and without your gift. If your income is $100,000 and your tax bill drops by $325 due to your $1000 gift then your net donation is $675. Increase your donation to $1500 and your tax bill drops by $500, leaving you with a net donation of $1000 (1%) and the charity receiving $1500.
What I do NOT suggest you do is just choose a random number based on something you heard at the bar and then decide its “good enough”. Part of the psychological boost of philanthropy is from thoughtful, intentional giving. Autopilot can be good after you’ve made your initial decisions, but I highly recommend that you spend a little mental energy at the outset determining what is right for you and your family.
Yes, but I have other priorities
Of course you do. We all do. At the risk of inciting wrath among the financial bloggers of the world, I am going to suggest that you prioritize your spending in this way:
- Actual household needs
- Health insurance
- Emergency fund
- Retirement savings
- Charitable giving
- College savings
- Things for your children
- Things for yourself
- Experiences that make you look good compared to others / inspire envy / allow beautiful Instagram posts
- Things that “everyone else is buying”
Why? Because that’s the order that will allow you to grow and give your hoard! That’s the order that will bring you financial peace of mind and psychological wellness. And if you prioritize in this way, then the mental gains from fulfilling 5-8 will far, far outweigh the temporary benefit of 9-13. You may find yourself caring much less about them, in fact. WIN!