Have you ever bought something that seemed like an awesome idea at the time but later you wondered if you lost your mind? It’s definitely happened to us (hello, $300 P90X kit purchased after watching an infomercial at 3am while eating a plateful of tacos after getting home from late the bar).
What about things that were mostly reasonable (e.g. a second car for the Paradise family), but cost so much money you agonized over that “should we have done that?” feeling for weeks or months?
And then there are times when you spend your hard-earned cash and you never look back, because you were able to spend it on something that is near and dear to your heart.
Over the last 8 months or so we spent about $10,000 for a very dear pet who had cancer. This was our choice because we had the savings and we would have done anything we could to increase our chances of saving her. We had $500 vet visit after $500 vet visit, but we never cared or worried about the money because for us that was the right way to spend it. Sadly, she passed away in February but spent her last days warm and safe at home with the people who loved her the most.
After going through this experience, we realized we wanted to do more to contribute to the causes that mean the most to us. To spend our disposable income in the “right way for us,” so to speak.
I adopted both of our cats from our local humane society, which is an awesome organization with a 4-star rating on Charity Navigator. They have programs that help abused and neglected animals throughout the state. They are also opening up a “cat cafe” about five minutes from our house where they will host “movie nights with cats”, “date nights with cats”, and my personal favorite “yoga with cats”.
Back in March I received an email from the Humane Society letting me know about a fundraiser to try to raise enough money to get the cat cafe up and running. Needless to say, not very much is going to stop me from getting to do yoga with cats.
And now I would like to introduce you to a method of charitable giving that wins the day in terms of frugality: Vanguard Charitable. Yes, if you’re like us and have caught the early retirement / financial independence bug, you already invest your money through Vanguard and now you can give it away through them too.
The Vanguard Charitable Endowment Program was founded by Vanguard about twenty years ago, but it is now a separate organization. They are a national “donor-advised fund” (DAF) organization, which means that they essentially “hold” endowment funds for you so that you don’t have to do any of the administration yourself. Money can be held in several different types of investments with varying degrees of risk (or in cash). Just like Vanguard, their whole deal is to minimize costs as much as possible, and to make those costs as transparent as possible.
So, why is this the best way to do charitable giving? Here’s why!
- Using a DAF means that you get the entire tax deduction for your funds in the year you put them into the fund, instead of when you distribute the money.
- You can transfer appreciated stock into your endowment and avoid paying any capital gains tax. This means you can give away more $’s and pay less tax. The difference can be substantial! (By the way, if you have stock with capital losses, sell it before you donate it so you can capture that loss.)
- You have close control over what information you want disclosed to the organization to which you want to donate. Want to be completely anonymous? No problem. What to dedicate your donation to someone? There’s a line for that!
- Your contributed funds can remain invested while you choose where (and when) to distribute the money. Your tax deduction remains the same whether the amount appreciates or depreciates.
- Moving funds into your account is incredibly easy, especially if you also have a Vanguard account.
How big of a deal is it to avoid paying the capital gains taxes on your contribution? Here’s a real world example:
The minimum initial contribution to Vanguard Charitable is $25,000, which is what we transferred to our account in March. About 20%, or $5000, of that was capital gains. The tax on that money would have been $750. If we had sold the stock, paid the tax, and then donated the money, our contribution (and our tax deduction) would have been $24,250.
However, since we transferred the stock directly into Vanguard Charitable, we paid no tax, we get to donate the entire $25,000, and our tax deduction is the entire $25,000. Our charities of choice get an extra $750, and with the extra deduction we save about $230-ish in taxes. That’s a nearly $1,000 savings!
Once you transfer your dollars into VC, you can put them in any of 13 asset classes. These are like mutual funds except that you only have access to them from within VC. The investment fee is 0.11% and the management fee is 0.6%. This may sound like a lot if you are used to the incredibly low expense ratios provided through Vanguard, but keep in mind this also includes managing your endowment fund and each grant you choose to make. In reality this is one of the lowest fees out there for a DAF.
When you are ready to distribute some of the money to a charity, you do what is called “recommending a grant”. It’s called “recommending” because Vanguard Charitable gets the final say in whether or not your grant will go through. It is set up like this so that you don’t try to take a tax deduction for donating to Uncle Joe’s New Car Fund, not because they want to actually control where you can donate your money.
Once VC checks out your charity, they cut a check and send it over along with whatever information you chose to provide about yourself and the donation. The rest of your funds stay invested in whichever class you decided on. At any time you can add more funds to your account or move between investments.
When you choose to give your money away to support a cause that is important to you, there’s no need to wonder if you put your spending to the right use. Our $25,000 is in memory of Asparagus, who brought six years of joy to our lives. I called her Cucumber on the blog but it’s time to use her real name.
What about you? What causes speak to your heart?