2018 marks our first year of having a Donor Advised Fund (DAF) through Fidelity. The effect on my giving patterns over the past year has been a pleasant surprise.
As I reviewed this year's giving and compared it with prior years, I was struck by the fact that we are giving more generously than ever before - roughly a 20% uptick in donations.
While I've never thought of myself as a Scrooge, it's worth exploring why I started a DAF, and considering why I seem to have donated more after establishing a DAF.
My rationale for starting a DAF was motivated (in part) by financial self-interest.
I was planning to give anyway, and I have a sufficient emergency fund serving as a buffer, so it made sense to batch several years of planned donations in advance as a single large donation to the DAF. This would ensure that the donation, taken in combination with our mortgage interest deduction, would qualify us for a greater net deduction than the increased standard deduction under the 2018 tax reforms.
Humans respond to incentives. Uncle Sam wanted me to start a DAF. No one puts Sam in the corner. I gave Sam what he wanted and started a DAF.
I dislike orphans.
Prior relationships sometimes result in unexpected offspring, leading to complicated situations (just ask the Brady Bunch). After I left Betterment for Vanguard, I brought along orphan shares of funds in my taxable account: funds that, if it weren't for the capital gains tax I'd have to pay, I'd just as soon have sold off to simplify our portfolio.
By donating appreciated shares of these orphan funds, we culled the winners, avoided paying capital gains taxes, and the DAF received the full contribution.
I'm not a very thoughtful person.
I am not skilled at buying gifts that aren't practical necessities for others. One of my less proud gifts as Anticlimactic Romeo was buying my wife wool socks for her birthday. I bought them online because malls depress me.
Since many of my friends are in fortunate financial positions, through my DAF I make charitable contributions to celebrate birthdays or commemorate milestones. No unsavory malls. No wasted commute time.
Best of all, I get to support my heroes in medicine as they perform meaningful international medical work.
I dislike hassles.
I can barely tolerate interacting with our hospital's electronic medical record, and I get paid to deal with that aggravation.
It's unbelievably convenient to make donations in honor (or memory) of a loved one via Fidelity. It's convenient, usually 5 minutes or fewer.
In part, the DAF has eliminated the barriers to giving that were present before:
- No need to itemize every deduction on a google spreadsheet.
- No need to track and store letters confirming donations.
- No need to write checks by hand.
Another excuse bites the dust.
I like wins and and I dislike losses.
With a DAF, the dollars have already been donated and we've already received the tax break. Mentally, it's like playing with house money.
Since the cash is no longer yours, the psychological loss aversion that tends to make humans reluctant to cut a check is absent.
Because giving has been front-loaded and packaged as a large deduction, you reframe the net loss to your bottom line as a tax win. Instead of feeling like your wallet is shrinking, you feel like you've taken advantage of a clever, entirely legal tax efficiency.
I'd love to say it's feeding my inherent altruistic tendencies, but I suspect it's my superior math skills as explained by the Dunning-Kruger effect.
Thank you, Physician on FIRE, for lighting a match under my butt to start a DAF.
No one has done more to put this giving vehicle on the radar of doctors than the notorious Physician On Fire, whose original post inspired me as much as his subsequent face off with the White Coat Investor amused me. It was Ali vs. Frazier for nerds! A finance geek's Clash of the Titans, sans cyclops. I could go on and on with the metaphors...
I prefer this new, less selfish me.
In the excitement of optimizing finances and pursuing Financial Independence, there's a real risk of inadvertently becoming a miser. Data consistently show that high-income households give less than low-income households. In other words, "I'll give once I'm there," may result in never giving what you know you should.
You maintain charitable fitness by giving those muscles a regular workout. You need to do it with regular donations to folks and groups who help heal our very broken world.
By removing barriers to giving regularly, increasing convenience, keeping me out of the mall and reframing my psychological approach to giving, having a DAF has increased my charitable contributions.
What's your giving experience, DAF and otherwise?
What tricks and tips do you use to maintain your charitable fitness?
Comments 9
Great recap of why a DAF is a great way to give charity, and having a place to dump “orphan shares” (love that term by the way) that have been following you since the beginning that you want to get rid of but were afraid to because of the capital gains tax hit.
Author
Thanks, Xrayvsn, for always being one of my biggest cheerleaders. No one rocks the sweater and pom poms like you.
Gratefully,
CD
I need to establish a DAF at some point. One of these days I’m going to check out POF’s post on DAF giving turtorial and create one.
Nice photo in Vancouver, btw.
Author
DMF, If you can save up and afford to batch 4-5 years of donations, it’s a huge win from a tax perspective. I linked to PoF’s article, it’s definitely the reference post of choice. Good luck becoming a big spender on charities!
I am at least 10 years into the Fidelity DAF, but I donated more last year than ever before, in order to get the deduction for one last time under the new tax regime. I made a 5-7 year “budget” of sorts, to allocate the funds in the count.
Wouldn’t you know that I spent the first two years of that budget donating to charities in 2018, including a large (for us) $5000 donation (we had never before given more than $1500 there in one year) to a beloved charity in which my wife is on the board, and she was given significant recognition for doing so.
I also enjoyed the WCI vs. PoF faceoff re DAFs, but in recent days, WCI has conceded on Twitter that he has finally opened one.
Author
Vagabond,
It’s interesting how after being so deliberate about spending, it feels good to “loosen the purse-strings” with donating more than intended. I’m trying to think of what the proper term might be – the positive feedback loop of virtuous indiscretion?
That’s an indiscretion I can proudly support!
Never got into DAF’s and sometimes not even any tax write offs. Just set aside some yearly dough and gave it away. If an acquaintance lost his job and needed help feeding his kids, it is what it is. If a village needed a well to have potable water, I signed a check. If it was my kid who had dysentery and the closest water was a 2 hour walk…. Not that I have anything against tax breaks, just a little different perspective. Somehow I still did OK. There are different kinds of “profits” that can be maximized.
Many truisms above. Human behavior leads us to do all kinds of crazy things, like part with large sums of money and feel good about it.
I love the fact that we are incentivized by the tax code to be more generous with our money. Like you, my reasons for starting up a DAF were partially selfish, but the presence of that already-donated money makes me much less so. It doesn’t sting to give away money that’s not mine anymore.
I aim to inform and inspire, and I’m glad to see I helped inspire you to be more generous. Thank you for further spreading the word!
Cheers!
-PoF
p.s. I see it made it in the comments above, but even WCI himself now has a DAF. What a jerk! 😉
Author
Thanks PoF! I think the world might benefit from more jerks like us.
P.S. Your comment was erroneously tagged as spam by akismet – apologies for the delayed appearance.