Sunday, February 7, 2010

Efficient Charitable Donations Can Earn You $300K For Retirement

In this recent post about the book Debt Is Slavery, we touched on the author's proclaimation that possessions are really a prison - that just about everything that you own costs money, time, and peace of mind.  However, the Giant Marketing Machine (GMM) as the author calls it, is out to convince us that we need more and more "stuff" - and that only through "stuff" can we achieve happiness.  The author advocated "putting stuff back into circulation" by selling it or donating it and taking the write-off on your taxes.  This aspect may also be particularly relevant right now as people being preparing their taxes.

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:
  1. 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.
  2. 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?
  3. 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.
  4. By failing to convert the item to cash, they miss out on the ability to invest that cash for a positive return.
  5. 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.
I'm certainly not advocating that anyone needs to become a monk.  I just want those people who fixate on "I can't get rid of it for 33 cents on the dollar" to get a better understanding that the actual exchange price of the item is only one small part of the economic impact of the exchange. 

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.


  1. Excellent analysis. Everything we own costs us money, even if it just taking up space in your house, i.e. a pool table sitting in your garage. This is especially the case, when it comes to maintenance or paying for a storage unit to hold your possessions.

    On a more fundamental basis, the things we own end up owning us. If you own finer clothes, you will spend more money on getting them cleaned and pressed. People who own newer, expensive cars inevitably spend more in insurance, initial costs, and "special treatment." If someone gets a dent in their 2010 Jaguar, they will also suffer more in non-economic costs, i.e. stress, anger, etc. than someone who gets a dent in their 2000 Corolla.

    Sadly, we live in a very materialistic society, where people are averse to getting rid of the golf clubs they haven't used in ten years or the old fishing boat taking up space in their backyard. And when you are talking about lawyers, you are talking about people who are largely self-defined by their outward appearance of success.

    Anyway, I love the examples you cited in this entry, MP.

  2. I've committed to making huge payments on my students loans this year and really take that principal down. As much as I'd like to forget about law school, these payments serve as a harsh reminder of the decision I made as a younger man. One of my recent posts is about a small victory about a smaller loan being paid off. That's saving our family $65 a month!

    On Saturday, I've listed some GI Joe Action Figures that I haven't taken out of the box on eBay, but there haven't even been any bids yet! eBay was trying to get me to pay extra fees for more exposure. I could try craigslist, but there's no market for them here.

    I also want to sell some private stock that I purchased three years ago. The company hasn't been performing like I thought it would. The investors who sold them to me were excited about the public announcement that never was. I just need the cash, and I'll probably sell it back to the company if I can. Cross your fingers there.

  3. Nando - thanks for the comments! You are certainly right that we are a materialistic society. Another thing that I see is that we are pretty indulgent and that we frequently indulge outselves even in the most minimal of emotional rewards. For example, there is a small emotional reward in having those golf clubs around - consequently we can't possibly get rid of them and we will pay to maintain that reward.

    Conversely, what sometimes helps me is thinking about my immigrant grandparents who came here broke and what they would do in the situation. Feeling the imaginary slap on the back of the head is pretty motivating!

  4. JD Underdog - Congrats on paying down your loans! It's a lot of pain while the paying down is going on, but afterwards you feel a lot better.

    With regard to Craig's list, my wife is a frequent user and we have bought some things at tremendous discounts. When she has tried to sell, though, the experience has not been as good.

    With regard to the stock, do you feel that the people that sold the stock to you made statements with regard to the certainty of the public announcement? Are you not an accredited investor and therefore subject to an even higher standard of investor protection? Perhaps you may want to also think about approaching the people who sold you the stock with regard to negotiating the proper sell-back price considering the circumstances. Good luck.

  5. If you have a car you no longer use, you'll get a tax deduction of at least $500 if you donate car to charity. Cars4Charities will gladly handle the car donation for you. Yust go to for details.

  6. Thanks Cars4Charities - if people are interested, here's another article on donating a car to charity

    I personally did donate a car to charity back when you were allowed to deduct the fair market value. However, if you are looking to get rid of a car, you may also want to consider CarMax (I had a later good experience there) - or providing the car directly to a charity for its personal use so that you can deduct the fair market value rather than the sale price. However, if you have a low-value car and are looking to get rid of it right away, a service like Cars4Charities could be useful - although I have no experience with them personally.