Why it’s Hard to Give Away Your Hoard

I’ve been following personal finance blogs for over ten years. I have layered strategy upon strategy to make more money, save more money and invest more money. I have also chosen to give a portion of my treasure pile to charity. Why do I choose to do this when others don’t?

High income giving – it still hurts

I’ve outlined the basic reasons why people don’t give here. But that doesn’t get to the heart of the matter. Many high income individuals have a hard time parting with their cash and I believe there are three reasons for this:

  1. They are high income but not high net worth (i.e. they spend all or more than what they earn).
  2. They have become psychologically attached to watching their hoard grow.
  3. As individuals gain money they become more focused on self-sufficiency and less on communal action.

I’m not implying that no one with a high income gives to charity; obviously many do. But doing so seems to be the result of conscious reflection, specific life experience, perceived moral obligation, or less inspirationally, a desire to minimize their tax burden. If the charitable tax deductions were eliminated, how many high income individuals would continue to contribute the same amount to charity? I don’t know the answer, but I am certainly curious about it.

My distinction between high income and high net worth is intentional. It is harder to give money away when you feel that you are barely making it as it is. Financial Samurai has a viral article on scraping by on $500k a year that’s worth a read for the comments alone! I believe that there is always money or time to give and that making a strategic plan can help with this. Furthermore, high income households that are not creating long term wealth are perpetually stressed. I could link to 100 articles here that show this but I won’t because frankly, it’s intuitive. Not having savings results in negative psychological and physical effects. Approaching someone who is in this state about giving away their money is like putting your hand in a dark hole and hoping nothing is in there.

The second reason is much more interesting to me. Obtaining a hoard is all about mindset: you have to believe that you have “enough” while spending much less than you earn. You don’t have to be zen (see Mr. Money Mustache – decidedly not zen) but you do have to make (initially) hard choices and adjust your lifestyle. You also have to budget and track your money. It’s this tracking that I believe leads to lack of giving.

Why? Firstly it’s because people rarely put “giving” as a line item on their budget. In my experience, those that do are religiously inclined. They have identified a specific cause they believe in and they have been advised to tithe a specific amount. They feel (rightly, in my mind) morally compelled to include giving in their allocation. If you don’t have an underlying religious reason then deciding to forgo a larger house, a new car or a trip with your family in exchange for charitable giving is a tougher sell. Furthermore, deciding HOW MUCH to give is significantly harder. As a result, many people focus their charity on donations of used goods and on their children’s sports, schools, etc.

Secondly, it’s hard to part with money. The psychological effect of “loss aversion” indicates that we are much more likely to feel pain when we lose money than when gain an equal amount. Think about gambling; it feels much worse to lose $1,000 than to win $1,000. If you have carefully curated a Dragon Cave where you have watched your $500 turn into $1,000 over a period of five years, then the loss of that $1,000 feels even worse. Terrible, in fact. You should avoid losing money!

Wait, that’s not the point of this blog. Giving is not losing!

This loss aversion effect is common among high net worth, personal finance obsessed individuals (myself included). It’s also common among retirees; when you spend 40 years watching the value of your accounts increase it can be psychologically painful to start spending them down… even if that’s what you were saving the money for in the first place!

So what about the third reason… high income earners don’t give because they are more focused on themselves and less focused on community? This is actually a proven effect. My research hasn’t turned up a definitive reason for WHY this is but there are lots of studies that show it is true. I personally find this interesting because I wonder about correlation vs. causation. Are those individuals who are more self-sufficient more likely to obtain a high net worth in the first place? Or is it the actual reality of having money that changes their mentality? My experience would point to the first option, although I am highly biased from working with engineers!

How to get over the pain

This is a blog about why you SHOULD give, not why you CAN’T give. So if you’re experiencing one of the situations above, how do you tear off the band-aid? I have solutions for you.

The solution to having a high income but not a high net worth is not sexy. It’s about having a budget and prioritizing your spend. There will be lots of future posts about this but to me the reality is clear: the way you spend your money is a reflection of your values, no matter how much you earn. Defining your values and finding a cause that resonates with your beliefs can result in psychological peace. Knowing that you are in control of your spending also reduces your stress and allows you to live a fuller life.

But once you have a budget, how do you fit giving into it? How much you give is a matter of personal preference. How much you can LEVERAGE your giving has a huge effect on the actual dollar value of your contribution. You can leverage your giving through tax strategies, of course, but you can also practice effective altruism, which is the idea of giving each dollar to the cause that provides the greatest bang for the buck. You can also leverage your philanthropic dollars and time through networking and career advancement.

Giving isn’t just about watching the dollars fly away – it’s about reaping psychological, monetary, community and career benefits while fulfilling a moral need.

Sure, sure, but how do you change your mindset and avoid the pain of loss aversion? This is the easiest part! All you have to do is make a plan. Know how much you are going to give and who you are going to give it to in ADVANCE. Schedule it in to your cash flow estimate for the year. Then, when you make your donation, give yourself a two hand high five for doing something awesome and get psyched up about watching your hoard re-build. If you utilize the strategy of tax credits, you will write a big check in November / December, see your net worth go down TEMPORARILY, and then get a GIANT refund check back in February (do your taxes early, it makes getting the check much more exciting).

I cannot tell you how excited I get each year knowing that I turned my $2,000 into $20,000 for my charities. Seriously. That’s true Dragon action right there! The psychological benefit is MASSIVE. Every time I do it I get jazzed up thinking about how much MORE I can do. And that, truly, is the best part. I’m not forgoing building my hoard. I’m not ruing the loss of my $2,000. I’m ecstatic about the impact that I am able to make in my community from using my financial savvy. It’s all about mindset. And you can do it too.


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