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Friday, February 24, 2012

A new way of thinking about charity

Yesterday Mr Money Mustache had a reader case study that was very interesting. Of particular interest was the fact that while the reader's income was more than his spending by only 100 dollars, he was giving $250 a month in undisclosed charity donations, but luckily had a huge emergency fund of 18,000 in cash.

The debate at the MMM site focused mostly on the merits of holding the emergency fund vs paying down a mortgage or investing, but what got me thinking was the charity giving, which the reader described as 'nonnegotiable'. Based on the percentage, I assumed the charity is tithe to a local church, but I could be mistaken, and for the point of this article, it doesn't really matter. But I had an interesting thought on the matter:

There is no particular reason why the money has to be given in monthly installments. It could be given in a large lump once a year, or in an even larger amount after 5 years. In the meantime, you could forgo having a separate emergency fund and invest that money instead, paying off a mortgage or buying income producing assets. If there was a legitimate emergency, you could borrow against the charity fund at 0% interest, instead of having to use a credit card or HELOC.

This method seems to address many of the issues that come up when trying to balance the issues of still giving to charity, having an emergency that can be accessed quickly, but also not giving up earning interest on your money.

So with this plan the charity, whatever it is, will end up getting the exact same amount of money when all is said and done, and you will have an emergency fund without having to adjust your monthly budget. And 'your' money will still all be earning interest and invested productively.

Something to consider if you make regular charitable contributions.

-The Money Monk

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