The Fourth Tenet of Financial Independence: Charity
Earn, Save, Invest, Give...but not necessarily in that order.
In Is Financial Independence About What You Make? I identified three tenets of achieving Financial Independence, but there is a fourth. I've already covered the following three:
Earning - You can't achieve Financial Independence if you haven't made anything!
Saving - If you can't keep anything from what you make, what will you invest with?
Investing - Time to make your money work for you instead of working for the money!
But the fourth is so essential, to dispense with it would jeopardize your ability to succeed in reaching true financial Independence: Charitable Giving.
Now I'm guessing some of you might be shaking your head at the idea. "How am I supposed to reach FI if I'm giving money away?"
That's a fair question. One I expect many to struggle with at first, but hear me out.
The Gift that Keeps Giving
Charitable giving is vital to your success. I can promise I speak from experience and have research to back me up. Allow me to explain:
Ordering your priorities - The first and most significant reason to be charitable is putting what matters most to you in its proper order.
Suppose your priority is the pursuit of material goods. In that case, you are more likely to define yourself through those goods, effectively becoming subject to the need to possess more of them. No amount of possessions satisfy when they are your priority.
If, as was the case for me, your priority is to break free of debt serfdom, incorporating charity into your budget plan from the start is an important step.
My wife and I decided early in our marriage to always commit a pre-determined percentage of our income to charity. That may seem counter to the goal of acquiring productive assets to establish independent income. Still, a fascinating dynamic takes hold when we make charity a core part of our FI planning. The insertion of charitable giving reorders our priorities, so our wants become tempered by the good we choose to do in lieu of those wants. Though it was sometimes stressful, there was never a year when we regretted the donations we made or decided to waver from that commitment.
There was also never a year where we found ourselves short of adequate earnings to follow the plan. For every surprise expense, there was a surprise financial gift that offset it and then some. As someone who believes in the promises of scripture, I'm not at a loss to explain why it happened without fail. In Exodus 23:19, God commanded the Israelites to give their first fruits to him as an offering. When they were faithful in doing so, there was abundance. When they chose not to, famine would often follow. I don't want to seem mystical about this point, but it comes down to the discipline and temperance we gain in choosing to be charitable and God's foreknowledge - as provided in scripture - of the good that comes from charity.
What you make and take - Reaching Financial Independence is a twofold ambition. On the one side is the successful creation of income from investments that work for you. On the other is learning to live at or below your means. Financial Independence can be attained faster for those willing to live simply. Once deciding to be charitable with a portion of your income, you take a small step in that direction by choosing to do with less. More specifically, to live below your means (the charity being excess of what you need).
The cool thing about adopting this mindset is that everything financial gets easier when you actively decide to live below your means. It creates an ever-growing cushion with every bump in salary or acquired productive asset. It can grow to thousands of dollars every month, and that is a beautiful place to be. While many of our friends and acquaintances set up 529 plans for each of their kids to fund college, we decided instead to commit to living below our means and kept building up that cushion year after year. We could apply it to any need that came along. When we had a quiet year, we'd identify a productive asset to invest in and pour that excess into the investment, and the cushion grew even more significant. We created a virtuous financial cycle, and once in motion, it became a grace to our household.
The secret to happiness - We all strive to be happy. For some, it remains elusive no matter what we do, and that's okay. Happiness is a want but not a need. That said, when medical researchers have studied the act of charity, they consistently find choosing to do good becomes its own reward. It activates a reward center in our brain - put there by you know who - and improves our internal chemistry! While nobody can guarantee happiness for you, there is evidence showing charity as a potent path to that end.
A better world - In a world where governments have greatly expanded their role as providers of a broad range of charitable activities, things do not seem to improve. There's a reason. Whenever government develops new services, they transform that service into a new base of power. Anyone who derives their living from that service as an employee has no motivation to see that service go away or shrink. Anyone who controls the purse strings of that service or agency does not want to see it go away or shrink. There are no incentives for the service to be efficient or effective. Continual growth is the only incentive for those overseeing and working in the service.
While it can be tempting to say, "I give my charity through taxes," to leave all such activities in the hands of governments is a bad long-term plan. Any government services you support to come into being will remain and draw on your resources forever. It will grow regardless of the community's need until someone at the top decides it should be shuttered (a rarity in government).
Private charities with no attachments to the government have a different mandate: To serve a need. When that need ceases, they must find a new need to support or cease to exist. Since funding is not enforceable (unlike taxes), private charities must make appeals for funding. The best way to draw support - all of it voluntary - is to show how effective and efficient they are in meeting the need they exist to serve. If they are not effective or efficient, supporting funds dry up, and they cease to exist. The result is every dollar given to a private charity is better utilized than if the same dollar was taken as a tax and put to the same use by the government.
A Few Tips on Charitable Giving
When you commit yourself to charitable giving, the question may be, "What should I give to?" The answer will offer a first glimpse of what job you want to have once you've achieved Financial Independence:
What do you care about most? - Your faith community? Theatre? Animals? Education? Feeding the poor? That aspect of life that moves the needle for you, the part to which you want to give more of yourself, will be where your charity should go.
Keep it local - Once you decide what matters most, look for opportunities to give to that cause close to where you live. Giving locally provides an opportunity to participate in the charity's activities more directly and to see their good work in action. Similar to being fewer degrees removed from any investment, the closer you are to a charity, the more you can influence how your dollars given to them get utilized.
Give in the ways you can - Early in your FI journey, finances might be too tight to give the biblically inspired 10% of your earnings. Don't let that be an obstacle to your charitable giving. Giving your time or special skills can be valuable when you don't have as many dollars. Do what you are able, just so long as you remain committed to that act of charity.
Challenge yourself - Once the cushion between what you earn and what you live on grows, increase your level of charitable giving as well. For charity to affect your well-being, it needs to be at a level that requires intentional sacrifice. If it becomes a mere drop in your financial bucket, you risk losing the benefits the giving bestowed on you in the first place.
Until next time, may peace and prosperity be with you.
The Natural Economist
Next up: A discussion of the Terrible, Horrible, No Good, Very Bad Economy.