Three Things to Know:
If giving back is important to you, and you’ve considered starting a scholarship fund or some other endowment in the future, we’ve got some good news:
You don’t need to be a millionaire to endow a scholarship. You can start today. Like, today Today.
If you can save 2% of your salary, you could create a multi-generational legacy in just 5 years.
Using a Donor Advised Fund (and some quick spreadsheet math) can help you reach your scholarship Goal faster through better investment returns.
Let’s Get To It:
How often do you think about your legacy? What you’ll leave behind and be remembered for?
Too often we think of legacies as something for MVP athletes with a record in the books, or wealthy folks with their name on a building. But in true GivingFund form, we’re here to question the notion that you can’t leave behind a legacy - like a scholarship fund - without breaking the bank.
What takes is a little bit of foresight, some quick math, a willingness to put some money aside, and opening a “Donor Advised Fund.”
First, let’s do a little level setting over definitions.
A Donor Advised Fund (DAF) is a philanthropic investment vehicle that lets you grow your charitable assets tax-free over time. It functions sort of like college-savings account, you put money into the Fund for a special purpose - in this case, a charitable gift. (For more on DAFs, check out our blog here).
An endowment is a gift made to a nonprofit organization for ongoing support. Endowments have two components - a principal and investment income. The principal is a large sum of money that is invested; when gains from the investment are realized, those gains are “skimmed off the top” and donated, keeping the original principal enact so it can be invested year on year, and continue to generate future returns.
For example, a $20,000 principal could be invested to generate 5% returns in the market. At the end of the year, that $20,000 grows to $21,000. $1000 goes to the nonprofit to fund programs, and $20,000 stays in the fund, invested for the next year. This process continues year after year, indefinitely. Without any additional money being added to the fund, it continues to pay out $1000 yearly.
Now, onto defining YOUR legacy.
Endowments are often created by extremely wealthy people as a means of starting a foundation - for example, the Rockefeller Foundation was started through an endowment of shares from Standard Oil back in 1909.
However, by using a Donor Advised Fund, you can actually save up smaller amounts of money over time, to develop enough capital for an endowment principal. Here’s another example. Say you want to fund a $1000 annual gift to local nonprofit to send an at-risk child to summer camp. If you save up $20,000 over the next six years, that $1,000 could live in perpetuity - meaning the interest earned on your $20,000 would pay out $1,000 to the charity each year - forever - without you putting any extra money into it, and without being taxed on any of the investment gains. Over just six years of saving a small percentage of your income, you could have an impact on a teenager’s life for as long as capital markets exist!.
Breaking Down The Math
Want to see by the numbers? Check out the chart below - it shows that you could start your legacy by setting aside $2,500 now into a DAF, and making one donation a year, in line with your income growth, for the following five years.
If you’re a professional making $125,000 a year, that equates to roughly 2% of your salary, each year, for six years. Not a bad investment for a legacy that will live on even after you do! Six donations over six years will allow even your children, and your children’s children to make this $1000 gift to charity every year.
Here’s how it works on a $125,000 salary today
This year, you save 2% of your $125,000 salary and put it into a Donor Advised Fund. You get your tax write-off for the donation, but you don’t actually give the money away. Instead, you invest this money through the Donor Advised Fund. Since you’re not donating it right away, you can invest it in the public markets (or in any other financial product you choose!). Let’s assume that the market grows at 5% each year. At the end of the year, you’ll have $2,625 saved up in the account. Note that since a Donor Advised Fund is a charitable vehicle, 100% of the gains are returned to the fund - none of the gains are taxed.
Now, it’s 2020 and you get a raise - for simplicity’s sake, let’s say its a 5% raise. You continue your commitment to donating 2% of your salary, which now equates to $2,626. Your fund now has $5,250 total. That amount gets invested and grows.
Then next year, you make another gift, and the sum grows and gets invested, and the next year another gift, and the sum grows and gets invested. By the year 2023, you’ll have over $20,000 in your Donor Advised Fund. Assuming 5% growth each year, that’s enough to make a $1000 gift every year, without any more donations into your fund.
Here’s how it works on a $70,000 Salary Today
Following the same process, you can still make your goal of $20,000 principal and $1,000 yearly gift with a salary of $70,000. It will take 1 extra year, and upping your charitable commitment to 3% (versus 2%) of your salary.
When put in terms of percent of your income, 2% and 3% don’t sound like much. And in truth, that’s how much most Americans who report deduction on their taxes are donating each year. (For more on deciding on “the right amount” to give away each year, check out this blog)
What Does This Mean for Me?
According to research from Fidelity, the average millennial is saving about 7.5% of their salary for retirement. It’s fairly common to use tax-advantaged vehicles like 401ks and Roth IRAs to grow your wealth. Imagine what could happen if people were as engaged in building wealth for the causes they care most about.
To get started on this journey to accumulate wealth on behalf of a legacy, the first step is to think about what you want that gift to be. You may want to work with your favorite nonprofit to understand different sums of money could mean to their programming.
Next, figure out what that means in terms of the size of the principal you need to save up. To do this, you need to estimate your investment growth. It’s hard to know exactly how the financial markets will perform, but a good rule of thumb (based on legal requirements for Philanthropic Foundations that are governed more strictly than DAFs) is 5% growth year-on-year. Take the size of the gift you’d like to make (ex. $1000 each year) and divide it by 5% to get your target principal (ex. $1,000/5% = $20,000).
Once you have a target goal, it’s up to you to decide how to save up for that goal - if you want to reach it faster, you may up your yearly commitments into the fund. If you can only afford 2-3% of your income each year, then commit to saving up over a longer period of time. We suggest using a table like the one in the section above to model different scenarios based on percent of income donated, and number of years you’ll make commitments.
Quicker Impact - Together
Today, giving is a more social experience than ever. People raise money through Facebook or GoFundMe campaigns to channel the generosity of communities. While Donor Advised Funds are set up in the name of a single individual, donations into to a Donor Advised Fund can be made by anyone. If you’re part of a group committed to raising money for a scholarship, consider opening a Donor Advised Fund and soliciting yearly commitments into the Fund. In this way, you can encourage people to make smaller, more manageable gifts, but make progress towards your principal even faster.
Feel ready to create your legacy? For more updates on how to create the most impact for your money, and tools to make giving to charity a better experience, sign up to join the waiting list to use our Donor Advised Fund product and we’ll add you to our community.