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Frugal yet generous, not greedy and selfish

April 26, 2017

Being frugal and smart with your money is not greed or selfishness - you can have room for generosity and giving in a sound budget. Give thoughtfully, using heart and head, for the greatest positive impact on the world, while holding to your budget and meeting your goals. The more personal finance blogs and articles I study, the more I believe that aside from the absolutes: the mega-rich on the Forbes list,  on the one hand, and those dying of preventable causes for lack of money on the other, wealth is very subjective and relative. One person can feel wealthy by paying off their debts and making it to zero net worth after being in the red, another can feel financially stressed even though they are earning well above the national average salary and have money in the bank. The psychology of wealth affects your ability to live a fulfilling life at whatever level you are, so it is worth exploring your relationship to earning, spending, having and giving.

 

Much of the frugality subculture implies a scarcity mindset that plays to the fear of not having enough ("will you have enough to retire?") and it exists in contrast to a mass culture of wasteful and conspicuous consumption, epitomized by celebrities from the current occupant of the White House to those atop the rap and pop charts. There's got to be a better way, a middle path, a higher road...

 

Spoken from the heart: why give?

According to researchers, being generous is one of the most reliable ways to create happiness for the giver: "Our findings suggest that the reward experienced from helping others may be deeply ingrained in human nature, emerging in diverse cultural and economic contexts." 1  This in turn translates to measurable health benefits, including the release of hormones that  protect your heart by lowering blood pressure and reduce the inflammation that causes many diseases 2.  The promise of a longer and healthier life doesn't sound like such a bad deal - and don't worry, we'll give you some suggestions below that can help ensure that generosity won't deplete your nest egg either.

 

Can we make the case that being good and generous is good for us,  because it's in our nature? The myths about human nature abound: people are supposedly greedy and selfish yet that doesn't square with the fact that the average American household gave $2,974 to charity in 2015. Two thirds of households donate to charity in a given year. If you are surprised by the level of generosity of your neighbors and the strangers you cross on the street, it may be time to question the myths of greed and consider how you compare to the averages. Do it "because everyone else does" sounds like a cheap argument, but it's an incredibly effective one. Psychology shows that we are persuaded by what others do.

 

It might sound ironic, but to feel grateful for what you have, give some of it. Abundance is a subjective experience as much as an objective reality, and some people are unable to feel satisfaction or gratitude no matter the level of wealth or income they acquire, which can lead to dysfunctional and wasteful financial decisions based on ego. On the other hand, feeling gratitude for your bounty is best expressed as appreciation in the form of sharing.  The Christian Science Monitor summarizes the Arthur C Brooks' research from Who Really Cares: "it appears to make the givers themselves more successful, possibly because the activity transforms them somewhat into better or happier people. Whatever the reasons, he finds that higher income tends to push up charity–and that greater charity tends to push up income."

 

So there you have it, generosity, though it doesn't make sense financially on the face of it, will make you healthier, happier and maybe even wealthier in the long run... besides, everyone else is practicing it, so why not you?

 

Now, let's get our head in the game: how to give?

Some people get a perverse thrill from literally burning money or figuratively flushing it down the toilet through lack of paying attention - I assume that's not you, by virtue of the fact that you are here, When it comes to your charitable giving, there's a difference between effective generosity and throwing money away.

 

1). Choosing your charity wisely:

Not all organizations are created equal, some are more effective while others are wasteful and some are outright frauds. Make sure you are dealing with a real nonprofit organization if you intend your gift to be tax deductible. In the U.S., that means the organization has to meet the requirements of the tax code - typically, this would be a 501(c)3 organization. Before writing a check or making a gift you can check any of the four leading rating services: ​​

 

2). Deciding what to give:

When you take your giving seriously and make it part of your budget, you might notice that it's no longer something you do casually when you get stopped on the sidewalk and asked for a contribution or when something you see online tugs at your heart strings as you're in a receptive or distracted moment. Give thought to how much you want to donate and also what form it can take.

 

I encourage business owners or the self-employed to donate goods or services aligned with your business capabilities and your long term interests- that's Strategic Philanthropy. Beyond sponsoring a parade and having your company name on a float, what you give can be more valuable than cash alone. In this case, think like the smartest companies do: like Cisco Systems when they used community charitable giving to build programs in schools in disadvantaged areas to train future network engineers, supplying them with up to date tools and curriculum.

 

"There is no inherent contradiction between improving competitive context and making a sincere commitment to bettering society. Indeed, as we’ve seen, the more closely a company’s philanthropy is linked to its competitive context, the greater the company’s contribution to society will be."  Michael Porter and Mark Kramer - The Competitive Advantage of Corporate Philanthropy - Harvard Business Review 2002

 

For those of us who aren't business owners, it is still worth considering what else you can give that would be more valuable than cash. In-kind contributions: Of course always, but especially when giving anything valued at over $250, make sure that you get a receipt from the charity and research what tax deduction limits may apply in your specific circumstances. Beyond a certain value threshold, it is required to have a third-party perform an appraisal of the value of donated items (e.g. if you have any Dutch masters' paintings gathering dust that you want to donate to a museum). It can get complicated.

 

Donating appreciated securities: It's more simple and very tax-efficient to donate investment securities like stocks that have appreciated or gone up in value since you purchased them. If you have done well with some investments, the absolute worst thing idea is to sell those investments to donate them to charity - you are much better off donating the investment directly before it gets sold. You are able to deduct the higher value of the donated investment today, without having to pay taxes on the capital gains, and the charity can sell it for the current market price at which it is trading.

 

Another option for donating known as the direct charitable IRA rollover is available to anyone over the age of 70 1/2 who has an IRA or 401k. You can donate "up to $100,000 a year in gifts to a charity directly from your IRA or 401k accounts." according to financial advisor, Stoyan Panayotov, CFA of Babylon Wealth Management, "Those contributions count towards the required annual minimum distributions you must take once you reach 70 ½, They also reduce your adjusted gross income... Your plan administrator has to issue a check payable to your charity of choice... If the check is payable to you, this will automatically trigger a tax event for [the] IRS." 

For the wealthier and more financially savvy, it may also be worth considering a charitable remainder trust, using donor advised funds or even establishing a private foundation in order to take advantage of tax deductions now while ensuring your legacy beyond your lifetime. For the rest of us who have high ambitions and a few good earning years left in us, it may be a great goal to make it to that level of success where these considerations apply.

 

Get advice from a qualified professional

If you have questions about the tax treatment of a charitable contribution or if you are interested in exploring the more advanced forms of philanthropy like charitable remainder trust accounts or donor advised funds, the first step is to get advice from qualified professionals such as a CPA or tax attorney.

 

Emerging forms of giving - crowdfunding

Crowdfunding is all the rage (or at least it was in 2013-2014) with gofundme, Kickstarter and Indigogo fighting for the top spot. Unlike traditional charity, that is all about established and appropriately vetted organizations, crowdfunding is much more fluid and rides on the wave of social media and peer-to-peer engagement. With crowdfunding there is typically no tax deduction but you get more of a sense of giving directly to real people or even people that you know. You also have opportunities to receive donor perks, recognition and the thrill of being part of the next new thing when you give to a trending campaign. I would recommend setting a strict budget before allowing yourself to get caught up in the momentum of the crowd.

 

 

My intention (let me know in the comments if it was met) was to give each person, no matter their level of wealth and income, a way to consider whether they can make room for generosity in their financial plans. The promise is that you will lead a richer life on some level by bringing your attention, heart and mind to the process. Consider discussing further with a FiClub coach, in a bootcamp or online if you are looking for practical next steps to putting your plan in action.

 

 

1). http://psycnet.apa.org/journals/psp/104/4/635/  - Prosocial spending and well-being: Cross-cultural evidence for a psychological universal.

2). http://www.quietrev.com/6-science-backed-ways-being-kind-is-good-for-your-health/

 

 

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