How do you donate money wisely? A financial adviser breaks it down.
“How should a client think about giving money to charity?” was the question my colleague posted on an adviser forum.
I should know this, I thought.
But since I couldn’t coherently answer my colleague’s question, it seemed like a good time to review the latest thinking on the subject and update what I tell clients.
Turns out, there are four steps to giving money away. Even better, they’re pretty easy.
1. Develop a donation strategy.
That’s right, a donation strategy. That might sound like off-putting jargon, but we all have a donation strategy, whether or not it’s fully baked and conscious.
For instance, a lot of people I’ve worked with seem to give money to anyone who asks. A lot of people give money to their college. For some people, the more desperate an emotional appeal, the more likely they’ll give. For most people it’s more hodgepodge than a strategy.
A lot of charities are de-emphasizing outreach that seeks donations by evoking pity. The poverty-stricken face of a child who seems to be saying, “Just donate to this charity and my suffering will be alleviated,” may be on the way out. After seeing enough of these ads, empathy overload kicks and you start to wonder, are these kids being exploited?
Celebrity causes are changing too. This parody is a plea for Africans to send radiators to freezing Norwegians. Hey, frostbite kills, too!
Instead of pity and celebrity identification, charities are trying to appeal to people based on effectiveness.
Develop your donation strategy by asking these two questions:
- What problem am I trying to solve?
- What do I value?
To make it easier, you probably don’t even have to answer both questions. If one seems easy, just start there.
Next, consider the balance between what’s near to you (your church, your alma mater) vs. what’s far (ending extreme poverty, disaster relief). You might have different ideas for each.
Here’s what Bill and Melinda Gates did. First they thought, and I’m paraphrasing here, “What problems is capitalism crappy at solving?” The thing that bothered them the most was inequity. Globally, they asked, “What’s the biggest inequity?” And for them that it was children dying and/or not getting enough nutrition to develop.
Locally they took a different approach and said, “Okay, our educations really helped us. We want to help alleviate the inequities in the US education system.”
If you want help pinpointing global issues, Philanthropedia has thirty-six different causes. You can weigh the causes against each other and figure out which is most important to you.
Close to home, if you’re looking for ideas beyond what initially comes to mind, it makes sense to check out your local community foundation. These are organizations that help budding philanthropists figure out their donation strategy. You can find them quickly through the Council on Foundations.
2. Figure out which charities will fulfill your strategy.
Next, explore charities that prove they are effective at having an impact in the areas you value.
Figuring out your local charities might be easier than the global charities. When you give money close to home, you can pretty easily get a handle on how effective the organization is.
When you give away globally, it helps to have third parties evaluate which charities are the best. They take out their measuring sticks and examine the numbers. They research: What charities fulfill their missions in the most efficient way?
Three websites that summarize data and report on the effectiveness of specific charities are:
It’s a good idea at this stage to use your intuition as well. Melinda Gates said, “We come at things from different angles, and I actually think that’s really good. So Bill can look at the big data and say, ‘I want to act based on these global statistics.’ For me, I come at it from intuition. I meet with lots of people on the ground, and Bill’s taught me to take that and read up to the global data and see if they match.
“And I think what I’ve taught him is to take that data and meet with people on the ground to understand, Can you actually deliver that vaccine? Can you get a woman to accept those polio drops in her child’s mouth? Because the delivery piece is every bit as important as the science. So I think it’s been more, a coming to, over time, towards each other’s point of view. And quite frankly, the work is better because of it.”
3. Donate and feel good.
Giving money away makes us feel better than spending money on ourselves.
Elizabeth Dunn and Michael Norton report in their book Happy Money: The Science of Smarter Spending, “The amount of money individuals devoted to themselves was unrelated to their overall happiness. What did predict happiness? The amount of money they gave away. The relationship between prosocial spending and happiness held up even after taking into account individuals’ income. Amazingly, the effect of this single spending category was as large as the effect of income in predicting happiness.”
4. Pay attention to results.
This doesn’t have to include spreadsheets or anything fancy.
Notice the communication you get from the charities. Is it always a pitch for more money? Do they communicate their results?
Do you see where your money is going? Are they fulfilling the mission that you were contributing to when you donated?
Keep in mind that not every donation is going to succeed. For instance, Bill Gates says that his involvement in the attempt to develop a better condom didn’t get the results he was hoping for. He doesn’t detail exactly what was so ineffective about the project, except mentioning with a vague smile, “We got a lot of ideas.”
Bridget Sullivan Mermel helps clients throughout the country with her comprehensive fee-only financial planning firm based in Chicago. She’s the author of the upcoming book More Money, More Meaning. Both a certified public accountant and a certified financial planner, she specializes in helping clients lower their tax burden with tax-smart investing.