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Only stupid people give to charity

“Only stupid people give to charity, I give enough with my taxes” – one of my coworkers said,  during lunch one day, when we were discussing the holiday fundraising in our office.

I just smiled and said nothing, but it certainly made me think. By nature, we humans are motivated by personal and material payoffs. We are inherently selfish, that is how we have dominated this planet.

But plenty of us give to charities, volunteer our time, blood, goods. Why? Why would a person decide to sacrifice part of his or her material payoffs in order to increase the well being of another? Sometimes the well being of complete strangers or another country?

The Giving USA foundation estimates that Americans gave $290 billion to charity in 2010. That is a lot of money for a Homo economicus! What motivates people to give?

Going back to our roots will remind us on WHY we give and allow us to figure out HOW we can give efficiently. Not just efficient from the charity’s point of view, but also to maximize the value we get from charitable giving.

Why we give?

There are several theories as to why we give to charities.

The Warm Glow : Donors derive an internal satisfaction, a “warm glow”, from their giving. These donors don’t mind being entirely anonymous. They don’t view the voluntary charitable giving and involuntary giving through taxes as equivalent.

Personal identification : This category is where a lot of donors I personally know fall. We might have lost a loved one to cancer, so we feel compelled to help other people with cancer as much as we can, or we might feel close to a community that has suffered a calamity, like Hurricane Katrina. We can relate to the victims and feel we should help out.

Prestige : These donors give mainly in order to show their wealth. Thus, they want to be recognized and want to be among the bigger donors. Economist William Harbaugh showed that when the names of donors are publicly announced and the gift amounts are given in categories (Gifts $500-$999 as “sponsors”, $1000-$1999 as “patron” and so on) most contributions were exactly the minimum amount required for inclusion in each category.

Cultural/Social/Society Influence : Tithing and other religious giving fall in this category.

Social pressure : These are the individuals who would rather not give but dislike saying no.

Perfect Altruism : These donors are similar to “warm glow” donors, but they think of a charity as deserving $1000 so if someone donates $900, they are perfectly fine with just donating the difference of $100. They don’t feel compelled to give more, where as the warm glow donors would much rather prefer to donate the entire $1000 themselves.

Tax benefits : There are a small category of people who give only to take a tax deduction. I personally know 2 people who gave to the Haiti earthquake cause because they believed that they will get it back in taxes. And they don’t even itemize! I initially didn’t want to include this category, but studies have proved that when a charitable organization mentioned that the “donations are tax deductible” the contributions increased dramatically.

How can we make our giving smart and efficient?

It is not only important to give, but to give smart.

So based on what motivates us, we can not only be efficient in giving, but we can also maximize what we get out of charitable giving – life satisfaction or spiritual enrichment or whatever value that drives you to give.

Personally, I fall in the personal identification category with some warm glow sprinkled on top of it.

If you are a warm glow donor, you can maximize the value by

  • Doing your homework : The more money that goes directly towards the cause, the more internal satisfaction you will get. So make sure you find out how the money is used. Ask the charity about their impact and the results. Seeing the results of your contribution will make you more happy.
  • Including philanthropic giving in your budget : You might be tempted to donate more when you are asked because you feel guilty to not give. Set aside a portion in your budget every month for charitable giving. Don’t feel compelled to give more than what you budgeted. Think of all possible ways to help without giving money.

If you donate because you can personally feel connected to a cause -

  • Involve your family : You might feel compelled to give to the local women’s shelter but does your spouse feel the same way? Have you sat down and decided on a charity allocation? What are the values of the entire family? How much will go to what cause? It is important to sit down and figure this out.
  • Pick 1-2 charities and give them the most : As the most important thing in your charitable giving is the cause, pick 1-2 charities that serves the cause and give them most of your money. There are a couple of reasons for this – (1) $1000 to one charity will be put to much better use than $100 to 10 charities, the processing fee of the $100 itself will take a good chunk out of it. (2) Reduce the junk mail! The lower the amount, the charity benefits more by selling your information than actually using the money. (3) They listen to you.
  • Study your charity but with context : I use CharityNavigator and Guidestar to research the charity of my choice, but I don’t take them at face value. For example, St. Jude’s children’s hospital is a major recipient of mine. Yes, only 87 cents out of $1 goes to the cause, but its a “hospital”. Good doctors will cost more money, operating a big hospital and all the staff costs money. Personally I feel a hospital is doing a much better job if they only spend 13c for administration vs an organization that functions solely as a charity spending 5c for administration.

If prestige motivates you

  • You do have a budget for giving and stay within that budget right? As with other areas of spending, keeping up with the Joneses will never do you any good, even if you are doing it for a good cause.

If social pressure gets to give more

  • Learn to say no. For your own good and for the charity’s good, just say no. If you don’t say no, the charity may continue to bug you and you’ll feel bothered, and their time will be much better spent reaching other potential donors.
  • Ignore the “sob” stories.
  • If you feel guilty, give by other means, time or blood or even just shopping,browsing and playing games online.

If you are the perfect altruist

  • Never give to a third party solicitor : If you give $100, the third party will take a cut and the charity won’t get the full amount. Always donate directly to the charity to give them the full value.
  • Ask what percentage of donations being raised is paying for fundraising expenses : Most state laws (at least CA state law does) require them to disclose this fact when asked.
  • Watch out for copycat or similar-sounding names.

If you are giving for tax purposes

  • NOT all charitable giving is tax deductible. If you don’t take an itemized deduction, charitable contributions mean nothing in terms of taxes.
  • Understand what the tax deduction means : If you are in the 30% marginal tax bracket, that means for every $1 you give, the price to you is 70c and the Government pays the rest, 30c. So you still spent 70c out of your pocket. It is good to give, but give because you want to give not just because of tax benefits.
  • Make sure to get a clear receipt with the amount and the charity’s name.
  • Make sure the charity is a 501(c)(3) non profit organization. Tax exempt is not equal to tax deductible.
  • If you receive a benefit because of your contribution such as merchandise, tickets to a ball game or other goods and services, then you can deduct only the amount that exceeds the fair market value of the benefit received.

And all of us should be

  • Proactive in our giving. As the charities get more desperate they will play with emotions, if we are proactive and decide what the plan is, we will be able to give wisely and maximize the enjoyment of giving.

Charitable giving fascinates me. Here is an infographic I put together with some interesting data. Did you know that charities collected more than the IRS in 2010?

Charity Infographics

Now, I have some questions -

  1. Why do you give?
  2. How important is anonymity/recognition in your giving?
  3. How important is the tax deduction? Will it swing the balance one way or the other?
  4. If you don’t give, why?

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