A better way to give on Giving Tuesday

It’s Giving Tuesday today, the day when we take a break from all the eating and drinking and arguing and impulse buying and traveling of the Thanksgiving holiday, and make a special effort to fulfill our charitable obligations. It’s a day for philanthropy and selflessness—but it’s also a day when we might be particularly financially depleted. After all, that food and wine and travel and bargain-shopping doesn’t often come cheap.

It’s good and noble to give money to charity, but many of us don’t do it enough, because too many stars need to align in order for it to happen. First, you need the motivation: some kind of impetus, like Giving Tuesday, which prompts you to actually do the thing you know you really should be doing at some point, but which you can generally put off to a more convenient moment. Second, you need the cash: a pool of money which you can give away.

Most importantly, you need a good cause, which ideally you will have spent a decent amount of time thinking about. The best place for your money is probably not the latest top-of-mind viral sensation, nor is it likely to be the charity which happened to allow your buddy get a coveted spot in the New York City Marathon. Which means that if you take your charitable donations seriously, the easy I’ll-just-support-my-friends route is generally not the smartest way to go.

So it’s worth slicing up your giving into its component parts. Start a list of favored charities, which you want to give money to each year. Separately, decide how much money you want to give away each year, and put that money into a pool dedicated to just that purpose. Then, every so often, but at least once a year, allocate your money among the charities. (Giving Tuesday is as good a time to do this as any.)

None of this precludes giving a few bucks to your friend in the marathon, or your other friend who poured ice water on her head. But at least it ensures that the bulk of your giving will be concentrated in charities you really want to support, and it also ensures that you keep your promises to yourself, in terms of how much of your wealth or income you want to give away each year.

There’s a range of ways to put this kind of strategy into action, ranging from a separate “giving” jar which holds one third of your child’s pocket money, all the way through to setting up your own charitable foundation. Banks like Simple make it easy to set up separate buckets to be used for a certain purpose with just a couple of clicks, and just about any bank will let you set up separate savings account if you ask them nicely. But there’s one tool in particular which is becoming increasingly popular: donor-advised funds.

The National Philanthropic Trust has just released its 2015 Donor-Advised Funds Report, which does a great job of aggregating data across all such funds. And the numbers are impressive: total assets have risen 24% to $71 billion, while the amount paid out in charitable grants last year rose 27% to $12.5 billion.

Most of this money comes from the top 0.1%: donor-advised funds have become popular with the Silicon Valley new-money ultrarich, partly because they’re cheaper to operate and more flexible than trying to set up a foundation. Crucially, they tend to lack mandates that you must give any money away. While foundations have to part with 5% of their money each year, most donor-advised funds have no such minimum. As a result, the new plutocrats can put all manner of assets into their funds, including private stock or real estate, garner significant tax benefits for doing so, retain significant control over how the money is invested, and then wait for decades, if they want, before actually disbursing the money.

From a public-policy perspective, then, there are real problems to donor-advised funds, as there are to the charitable-donation tax deduction in general. But from an individual’s standpoint, they can make a lot of sense. For one thing, they massively simplify that charitable deduction: you make one big donation to the donor-advised fund, take one big deduction, and you’re done. After that, you have every incentive to give the money away—if you don’t, it’ll just sit there in the stock market, generating fees for some for-profit financial institution, and doing very little good for the planet. (That said, with any luck, it will grow a little as stocks go up). And the great thing is that when you feel that you want to make a donation to a good cause, doing so is easy and painless. You’ve already given away the money; all you need to do is determine who’s going to receive it. You’ve separated the pain of writing the check from the pleasure of bestowing money to a worthy cause.

Better yet, you can minimize the pain of writing the check, since you can time it for whenever you’re feeling the most flush. Maybe you got a bonus or a raise or an inheritance, and promised yourself you’d spend a third of it, save a third of it, and give the last third of it to charity. That’s easy to do: you just set up an automatic deduction of that part of your paycheck, straight to the donor-advised fund. You never even really see the money, so you never miss it.

Donor-advised funds also help you concentrate your giving on pure donations, rather than on tit-for-tat “transactional philanthropy” where you get some kind of “free gift”, or membership, or your name on a thing, or seats at a gala dinner, when you cough up a donation of a certain size.

And while a lot of the ultra-rich use donor-advised funds for their philanthropy, you don’t need to be a gazillionaire to follow their example. Fidelity, for instance, has an arm called Fidelity Charitable, which you can fund in just a couple of minutes with a minimum investment of $5,000. That’s a substantial amount of money, of course, but once you’ve seeded your fund, you can stretch it out as long as you like. Yes, these products do make money for the companies offering them. But that’s maybe not entirely a bad thing. The fact that the products are profitable means that the companies actively sell them, and thereby are playing their own part in encouraging more people to give more money to charity.

So this Giving Tuesday, perhaps think bigger than making an individual donation or two. Instead, if you have the money to spare, start up a donor-advised fund. It makes giving easier, it makes doing your taxes easier, and it forces you to think about how much you want to give in total, rather than to any given recipient. How generous can you be?

This post has been updated. It originally said that Schwab Charitable, another donor-advised fund, insists on a $5,000 minimum account value at all times; that’s not true. You can spend down the minimum $5,000 contribution at Schwab Charitable much as you can at Fidelity.