Wednesday, May 22, 2013

The Power of Investing Generously

Historical Philanthropy

My recent sabbatical from blogging has given me ample time to dwell on what I believe to be an important topic for anyone with the means to invest: giving. This may be a bold statement, but  regular giving can be one of the most powerful catalysts to your long-term financial goals. I'll tell you how in a moment, but first let's take a look at America's charitable history.

To put things into perspective, charitable giving typically grows at about one-third the rate of the stock market - approximately 3% annually. This is about 1% less than the inflation rate, and 2.2% less than the combined inflation rate and population growth rate. So what does this mean? It means that, per household, Americans are only giving 46.73% of what they were giving in 1975.  Inflation-adjusted private giving in the US has remained stagnant at $298B from 2001 to 2012 - why? There are many different theories as to why the steady decrease is happening (which we will not discuss here), but ultimately it has resulted in an increase in what I call "filtered giving". Since most of this readership are of an intelligent, blog-reading nature, I'm certain you can deduce what I mean by this. Simply put, less money is being directly poured into needful hands and more is going into charitable for-profit companies (like Tom's) and ginormous, 16-trillion-dollar-debt elephants in the room.

Naational Debt Cartoon

Let me throw in a quick disclaimer - I don't have a problem with Tom's, my wife loves Tom's. But let's be real, buying Tom's shoes is not giving. Don't argue - it isn't. According to this intriguing article, Tom's profited $4.6 million in 2009 - during the financial crisis! Which means that a large portion of this amount plus the cost of their trademark "one-for-one" shoes could have been directed towards targeted direct-giving opportunities. Once again - not saying Tom's is bad, but at $60 for a couple straps of cloth and a slab of neoprene, I would dare to say that Walmart may be the more charitable of the two.

Living without Abiguity

So how do we bridge the gap between what we were giving as a nation 35 years ago versus what we are giving now? Apart from electing solid government officials and praying for more discretionary income, there are several ways to ramp up your giving potential:
  1. Make your favorite inelastic-goods companies donate for you: 
    1. Invest in a company with historical dividends and dividend growth such as Johnson and Johnson (JNJ), Kraft (KRFT), or Eli Lilly (LLY).
    2. Have the dividends injected directly into the organization of your choice. Many large brokerage firms have this option available, and it works the same as a direct funds transfer*. 
  2. Prepare and manage your post-retirement fund: Nope, you didn't read it wrong - what is your plan for after retirement? Well, it won't last forever; something to think about.
  3. Budget for "discretionary giving": Instead of saving what's left over, create a budget category for saving and write yourself a check for that amount each month. Start with a baseline of 10% of post-tax income and move up or down depending on your situation and what you are comfortable with. The idea is to stretch yourself in this category in order to see where you can cut in other areas. Then resolve yourself to give what is left over at the end of each month. Hence, discretionary giving.
Obviously, the first step to any of this is locking in a regular income. I have to admit, I am somewhat bias to the seemingly antiquated notion that there will always be work for those willing to sweat, but hard times befall the strongest of men. Therefore leave the judging to the Judge and throw your excess to the hungry. After all, sheer joy is nothing short of an unexpected gift in a time of need.

Next Post: The Wises Build a House

 Government Seeks to Limit Charitable Deductions: How Could They?
*Learn more about partnering with Fidelity on their charitable giving page

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