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WHAT I’M THINKING ABOUT: Smart and intentional giving
The new tax laws are projected to decrease charitable giving by $17 billion (or 4%) in 2018 — blame the larger standard deduction, which more taxpayers will take instead of itemizing deductions like charitable donations.
It’s now more important than ever to manage your finances wisely so you can support worthy causes. Here’s how to be smart and intentional with your giving.
Budget your giving
Giving should be a joyful experience. If you want to make giving a routine part of your life, then be proactive and plan for it by baking it into your budget. Budgeting your giving often generates more joy and satisfaction, even when your standard of living takes a hit because of your generosity. Knowing how much you get to spend on giving each year creates real freedom.
Treat your giving (along with your saving and debt payments) as part of your financial responsibilities, which get first dibs on your income before any spending. This will force you to decrease your expenses to accommodate your giving, as opposed to simply giving what’s left over each month (which may be nothing!).
If you don’t have a budget, or you’re looking to spruce yours up, you can download our newly revamped one-number budget spreadsheet here.
Automate your giving
Once you’ve committed to an amount to give, don’t wait until the end of the year to make it happen. Instead, automate it! You can do this by either setting up monthly transfers to your target organizations, or monthly transfers to a separate savings account earmarked for future giving. This second approach allows you to respond as needed to giving opportunities that arise (such as humanitarian crises or natural disasters). Personally, I like having a mix of automated monthly giving to organizations (they love this, by the way) and monthly savings for giving so I can flexibly respond as needs arise.
Here are some tips on getting to most bang for your buck when giving:
Bunch your giving. With the standard deduction higher (in 2018, $12,000 for individuals and $24,000 for married filing jointly), you’ll need to give more compared to previous years to benefit from deducting your charitable giving. One approach is to bunch your giving — instead of giving $10,000 in 2018 and $10,000 in 2019, bunch the entire $20,000 into one year, for example. If you’re using monthly transfers to a separate savings account to build up funds for giving, you’ll have the flexibility to time your giving for potential income tax advantages. Caveat: Keep in mind how bunching your giving will impact the organizations you support. Especially if you're supporting a small or local cause, consider giving them a heads up that the timing of your giving will change or don't bunch giving to these organizations.
Give appreciated stock. One tax-efficient way to give is by donating stock that has appreciated above its cost basis. You’ll avoid paying capital gains taxes and can deduct the fair market value of the stock on the date you donated it. (Just be sure you’ve held the stock for more than one year, otherwise you can only deduct the stock’s cost basis.)
Donate by cash instead of credit. If you donate by credit card, the organization will have to pay a processing fee — typically 2% to 3%. While we all love our credit card points, they’re typically not worth the fee hitting the organization you’re supporting.
Do your research
Finally, do your research and make sure you’re giving to a reputable organization that will use your money effectively. Use Charity Navigator, GiveWell, Guidestar, Excellence in Giving (deeper analysis, but not free), or the BBB Wise Giving Alliance to research the organizations you’re considering.
WHAT I’M READING
Here are two interesting articles I read this month:
The Trait That Determines Whether You’re Good With Money
By Charlotte Cowles, The Cut
Many people talk about financial literacy, but fewer talk about financial self-efficacy — believing in your ability to apply personal finance knowledge to your life. “It’s optimism mixed with knowledge and resilience.” A recent study found a major correlation between financial self-efficacy and financial health. This really highlights the emotional side of money. Knowing a lot about money doesn’t make you great at managing your own money. You have to learn to apply it and believe that you can. The article points out several key components to growing in financial self-efficacy: educate yourself, work at it, have a role model, and find accountability.
“And finally, be patient: Self-efficacy isn’t perfection. You will make mistakes. What’s important is that you believe you can improve.”
It’s Time to A/B Test Your Financial Life
By Dr. Shlomo Benartzi, The Wall Street Journal
An A/B Test is a popular marketing strategy of testing two versions of something to see which performs better. What if we applied this approach to our finances? It’s easy to get stuck in a particular spending habit, but as life changes, our needs and preferences change — so why don’t we proactively reassess our spending habits? Make some changes and test your habits. For example, if you pay for an expensive gym, try a cheaper one (or running in the park) for a season to compare the experience and weigh the savings. Or, if you like $40 bottles of wine, why not try boxed wine for a few weeks and evaluate the trade-off?
At its core, the question is how will you be most satisfied with your money. This can also work for more complex decisions, such as career choices and when to retire. The author encourages us to “test-drive our dreams.” Be mindful and run some A/B tests of your own this summer.
“Americans are devoted to the pursuit of happiness. Unfortunately, research shows that many of us don’t actually know what makes us happy, so we end up pursuing the wrong things. The good news is that self-experimentation can help us figure it out, allowing us to pursue the right things before it’s too late.”