Give Money, Feel Happy

givinghands
“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:

charitynavigator.org
givewell.org
guidestar.org

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.”

By Bridget Sullivan Mermel
Originally posted on Money.com
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Buying a House? Talk to Kojak

Kojak
Terri and David came in for a meeting with me. They were expecting a baby and wanted to buy a house.

They had their eye on a $500,000 house, and wanted to make a down payment of 5%, or $25,000. Their question for me: “How should we make the down payment?”

David, who had $30,000 stashed in a safe deposit box, wanted to use that cash for the down payment. Terri wasn’t quite sure that was a good idea. Terri hugged her chair nervously.

Their basic problem was becoming clear: David worked in a business that can be largely cash. Terri liked to follow rules. She wanted to know whether showing up at the closing with a pile of $100 bills would get them into trouble later.

It’s at times like this that you need to remember
Telly Savalas. That’s right, the actor who played the detective Kojak in the 1970s TV series of that name. He was famous for sucking on a lollipop and saying, “Who loves ya, baby?

“You’re asking the wrong question,” I said to them.

I had their attention.

“What both of you should be worried about is that you can’t comfortably afford this house,” I said. “I don’t care where the down payment is currently located. Let me be clear: You’re buying too much house.”

“But the mortgage guy said that we could swing it,” said David. “I should be able to replace the cash in a year. I’ve calculated it all out and we can do it before the baby arrives.”

This is when we need Telly Savalas.

The answer to the question “Who loves ya baby?” is not “your mortgage broker” or “your realtor.”

This is a lesson I learned the hard way.

Before I started working as a financial planner, I didn’t know what I know today. I made a big mistake.

I bought a house I couldn’t afford. That’s not what I intended to do. It’s just that I was listening to the wrong people and not to Telly Savalas.

I focused on how much mortgage a bank would lend me. Here’s what my experience taught: The bankers don’t love me. They don’t give a rip about me. All they care about is making the most money for themselves. They got their money, but I was miserable.

I made the decision in a month or two and locked myself into the expenses for years to come.

In retrospect, this was predictable. A good rule of thumb is that a home is out of your price range if it costs more than two or two-and-a-half times your annual income. The house I bought was way over this range of affordability.

Housing costs soaked up my disposable income and made it tough to save. Living paycheck-to-paycheck, I couldn’t afford a decent vacation. When an emergency arose, I didn’t have adequate funds. So I felt the stress of both the emergency and scrambling to pay for the emergency.

All this stress was unnecessary.

If I did it right, I would have bought a condo that cost less than 2.5 times my annual income — say, $150,000 instead of the $200,000 I spent. And I would have saved up and made a 20% down payment, not the 10% payment I made.

Yes, the location wouldn’t have been as nice. And I wouldn’t have had an extra half-bath and an icemaker, both of which I enjoyed having — but which I didn’t really need.

Mortgage people and realtors will tell you there isn’t much of a difference. Let’s run some numbers, though: what I did, and what I should have done.























What I did

What I should have done

Home price

$200,000

$150,000

Down payment

20,000

30,000

Monthly mortgage & tax

1,400

860

Monthly assessment

140

110

Monthly utilities

95

75

Monthly maintenance

165

125

Total monthly cost

$1,800

$1,170

Spending $1,170 a month on housing would have been fine. Spending $1,800 made me feel “house poor.” It wasn’t the mortgage. It was everything else.

My message to Terri and David: David, report your income. Then, Terri, it doesn’t matter if the money is stored in a savings account, safe deposit box, or plastic baggie in the basement freezer. Don’t worry about it. And for the question that you didn’t ask: When buying a house, remember who loves ya, baby!
By Bridget Sullivan Mermel originally published on Money.com

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Buying a house? Avoid these five pitfalls

rentorbuy
An alert reader tipped me off to this really cool rent vs. buy calculator:

http://www.nytimes.com/interactive/2014/upshot/buy-rent-calculator.html

The biggest mistake people make when buying a house is over-buying. Before I was a financial planner, I made this mistake myself. I focused on how much of a mortgage a bank would lend me, not on the fact that I still wanted to be able to take vacations after I bought.

Many times you make the decision about how much to buy in a period of about a month and you lock yourself into the expenses for years to come. Most people buy a place that’s nicer and more expensive than what they rent.

The biggest issue that people have with houses is buying one they can’t afford.

Here are five tips to avoid overbuying a house:

1. Put 20% down. Right now in Chicago if you’re buying a condo, make that 25%.

2. Buy a house that is 2-2.5 times your annual income. Live in New York City or San Francisco? Raise it up to 3 times your annual income if you absolutely must. You’re not getting away with anything; you’ll have less to spend on other things.

3. Trade up when your house is 100-125% of your annual income.

4. Realize realtors and mortgage brokers make more money when you buy a more expensive place. They don’t necessarily have your best interest over the long-term in mind.

5. If you don’t want to buy a house, don’t buy a house. A lot of people know they might want to move, or don’t want to take the risks and responsibilities associated with buying one piece of real estate. Follow that instinct, and save the money instead. Owning a home can make sense at certain times in your life and not in others. That’s fine.

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