However, I have noticed that people, especially some lawyers, just don't want to let things go or donate them because they feel like they are not getting a good "deal" on the exchange. For example, they don't think that recouping 33% (or 28% or 35%) of the fair market value by donating the item is a "fair price" or that is does not match the emotional value that they assign to the item.
Although the decision to donate or sell an item seems like a straightforward transaction, there are actually some financial aspects that might not be immediately apparent, but can be valuable to consider. These aspects could actually have a financial impact worth several multiples of the fair market value. More on this below.
First, I can appreciate that many items can have sentimental value - there are certainly some things that I won't sell.
Second, I acknowledge that donating items to charity is really only valuable for those who itemize deductions. However, although most law students probably don't itemize, my estimate is that most lawyers do. Once you have to pay a high state income tax bill or start talking about home ownership, you are usually in deduction territory.
In this regard, many people - and especially lawyers - often have a whole load of junk that they could turn into cash by donating or selling it. By holding on to this stuff, they lose out in at least the following ways:
- They own items that are depreciating in value. Thus, the worth of the items and their contribution to the lawyer's net worth continues to decline.
- There are often costs associated with owning the item - even if it only takes up closet space. Don't even get me started about those people who rent a self-storage container. Also, for example, if you own a lot of CDs, then you need a rack for them - that's an additional expense, right?
- There is a risk of loss of the item. For example, if you own a painting, it might get damaged. Conversely, cash in a CD has very minimal risk of loss.
- By failing to convert the item to cash, they miss out on the ability to invest that cash for a positive return.
- They may even be able to monetize the absence of the stuff! For example, a lawyer that lived downtown decided to use Zipcars and sell his car - he drove it very rarely and between insurance, license, etc, it was costing hundreds of dollars per month. Additionally, once the lawyer got rid of his car, he was able to rent out his parking space to someone else in the building for several hundred dollars per month.
Also people should be aware that:
Every possession that you own is costing you money.
It might be only a little money - like a book on a book shelf - or it might be a lot of money - like a car. You might be able to see how a car can be costing money (insurance, license, depreciation, etc.), but sometimes it is difficult to see how a book can be costing money. In this regard, I am going to ignore the fractional cost of the bookshelf that had to be bought to support the books, and even ignoring the fractional cost of the space occupied by the book shelf (both of which, although small, may add up over a 20-year span).
Even ignoring those items, the book is costing you money because it could be turned into money and that money could be producing a return. For example, assume that the fair market value of the book is $12. The book could be donated at 33% to provide $4 in cash. That cash could be invested in bonds at 5% in order to produce 20 cents/year. (Now, that's not a lot of money - but then it's not your only book, either.) That 20 cents/year that you are missing out on is what the book is costing you.
(Note that in the example above I am assuming that the value of the book is neither appreciating nor depreciating. Depreciation would make the book cost more per year).
Now, as I mentioned, 20 cents/year is not a lot of money. However, think about just how many items you have laying around that could be turned into cash - many books, clothes, CDs, DVDs, that old bike you don't use any more, etc. A few years back I helped a few friends with this exercise and all of us donated at least $3,000 worth of stuff. It was amazing just how quickly stuff added up - and we were reasonable with our valuations.
As far as determining valuation, here's the Salvation Army valuation guide. You could also try to look at thrift store prices, but it's probably more time effective just to stick with the Guide. Try to give an accurate valuation of the item - typically few of your items would be at the top of the range of values.
Now, considering a donation of $3,000, it puts $1,000 in your pocket at a 33% tax rate. That $1,000 can be invested to provide you with $50/year or a little more than $4/month. That doesn't seem like a lot, but it is more than you had - and it's buying you a cheap lunch at McDonald's once a month.
Alternatively, the $1,000 can be invested for maximum long-term return instead of income. As we previously discussed here, the average long-term return of the SP500 has been about 10%. If you invest at 30 and let it grow to retirement at age 65, the $1000 becomes $28,102 according to this calculator. That is no longer chump change. Even if inflation halves the value at 65, that's still no longer chump change.
Even more powerfully, what if you are able to donate $3000/year from the time you are 30 until retirement? At first, that may seem a little high, but with a wife and kids you may be frequently in that range. Kids outgrow a lot of clothes - and toys.
If you were able to donate $3000/year worth of stuff and invest $1000/year from 30 to 65, that gives you $326,229 according to this calculator. That's a whole lot of money - even if inflation halves it. Even if you can only do it for 25 years, that's still around $120,000.
Thus, to those lawyers who have a garage full of stuff that they don't use, but don't feel like they can donate because "it's a bad deal to get 33 cents on the dollar" I say that when you retire you can either have 1) that same garage full of stuff, or 2) several additional tens or hundreds of thousands of dollars. Your choice.
Saying it another way, don't let money sit around being lazy. If you want to make the conscious choice to keep a certain object, then that's fine. However, make a conscious choice - and if you are not really using the item any more (if the item is no longer really "working" for you in the personal enjoyment sense), then convert the item to money and let the money get working for you - rather than just sitting around depreciating at the rate of inflation. The small investments that you can make in this fashion can really add up.