This is one of those posts of me “thinking out loud.” It’s a chance for me to reflect upon one of the most sensitive topics in personal finance: trying to find the right amount of money to give to charity when you are in the beginning stages of wealth accumulation.
One of the “life models” that I keep in mind has been the path that Warren Buffett has chosen to follow with his own charitable giving. For most of his 20s and 30s, he did not give much to charity. He had set up The Buffett Foundation to give $20,000 here and $75,000 there to specific causes, and according to Roger Lowenstein’s Buffett biography, that only constituted 3-5% of his annual income. According to Lowenstein, most of Buffett’s early charitable acts were done at the behest of his wife Suzzie, and he generally viewed charity as a hindrance in the wealth-building process.
Of course, as we have come to know now, Buffett has pledged to give well over 90% of his personal fortune (estimated to be over $50 billion) to the Bill and Melinda Gates Foundation, with the instruction that all the money be spent within ten years. No doubt, Buffett’s decision to delay charitable giving on a grand scale has enabled him to do “maximum good” for the world. If he donated 40% of his annual income to salary for the past 40 years, it is very unlikely that he would have anywhere near $50 billion to donate today. It is fair to say that Buffett’s gift-giving strategy allows him to change the world even after his death in a much greater way then if he had parted with his wealth earlier. Each dollar that Buffett would have given to charity earlier in his life would not have been able to compound at 20% for years on end to be given to charity later.
On the short list of “big philosophical questions” that I have yet to come up with a satisfactory answer in my own life has centered around how much of my annual income I should donate to charity now while I am not a financially independent person. The biblical story that immediately comes to mind is Jesus’ praise of the poor woman that chose to donate a drachma (schekel?) at the synagogue even though it caused her great pain to do so. Who can argue with the example set by the Son of God?
On the other hand, we have the Parable of the Talents in which Jesus praised the most industrious of the brothers who was able to effectively put his capital to work, while condemning the wasted utility of the brother who hid his gold in the ground and zealously guarded it. In that case, it seems that Jesus praised the brother that maximized his potential. If we give away capital in our formative years, aren’t we in a way hindering our own potential? If you have $35,000 today that could compound at 10% for twenty years and choose to donate that money to charity instead right now, you are giving up the potential of your future self to take that $250,000 and, say, buy a Subway franchise that could be a part of your retirement restaurant empire. That potential cannot be realized if you donate it. Also, that money represents a quarter of a million dollars that you could be donating to charity in 2033. What does the world more good, $35,000 today or $250,000 in 2033?
Also, there is a question of whether donating money to charity is an effective form of self-discipline because it forces you to help others without doing anything directly good for yourself in return. Physically, there is a thrill you feel after you run a five mile race. Some dieters get a thrill out of making those long-forgotten fruits and vegetables a part of their diet for the first time since the Clinton Administration. Isn’t there a significant rush of adrenaline associated with willingly depriving yourself of a meaningful amount of money that you could otherwise use for personal consumption?
In some ways, the Buffett approach makes the most sense. By delaying most of your charitable giving to later on life, it allows you do to the maximum amount of good. For those of you with the general life goal to make the world a better place in the most ways possible, it by definition would do more good to delay charitable giving if you could use that money to compound at a rate greater than inflation, since that increases purchasing power down the road.
On the other hand, there are some risks associated with delayed giving. Investments can fail, there are people living today that need assistance, the noble act of sacrifice gets delayed, and there is also the possibility that the long-term neglect of charitable giving can lead someone’s heart to harden against helping others. Aristotle once said, “We are formed by what we do.” He called habits the most powerful force in the universe. If we get in the habit of not giving throughout our lives, aren’t we setting our future selves up for failure?
The standard approach to giving that I often hear is some variation of “donate 10% of your annual income to charity.” There is nothing wrong with that, but I have never gravitated towards it because it has the same sort of mindlessness that you see in rules like “an investor should subtract 100 from his age to determine what percent of his money he should put into stocks, and what percentage of his money into bonds.” There is nothing wrong with that, but it short-circuits the critical thinking approach.
For anyone reading this, I’d be really curious to hear what approach you take to charitable giving. A lot of times, blogwriters put something like this at the end of a post just to stimulate comments or do something to that effect. But this is one of those topics where I am particularly open to the strategies of others, and I’d appreciate it if you’d take a moment to share with me what you do. I’m a bit of a blank canvas on this topic, and it would mean a lot to me if you would take a minute and contribute some paint to the finished product.
Originally posted 2013-06-03 09:00:28.