In my first post about the perpetual value method, I mentioned that it was actually a spinoff of another budding concept I was working on. After reading up on the Norwegian Sovereign Wealth Fund, I was exploring a concept that would leverage how endowments work so that individuals could make philanthropic contributions perpetually, starting at only $20 per month. As I explored it further, discovered that in theory, we all have the capacity to build philanthropic foundations that can have $1 Million in assets, without having possessing a six-figure income. All we need is time to let the momentum to take root.
This concept still is a form of what I’ve been calling the Perpetual Value Method, even though this was the precursor to what my previous posts focused on.
This method is based on the understanding that if consistent investment contributions are paired with consistent withdrawals, each contribution achieves a continued life cycle that gets used for consumption indefinitely. Under the lens of personal finance, these withdrawals replace the means of our personal consumption coming from wages so that the wages can be invested, but what if this principle was used for other means other than our personal budget?
We can actually leverage this concept to restructure our means of benevolent contributions as well. We can take the money that we were going to donate, and instead postpone that donation a bit by putting that into a separate investment fund that we can cash out a portion of to then use for donations over time. This will allow us to stretch the impact a given dollar we donate, as it will have exponential growth over time.
The Issue with Donations
In general, I believe we all would like to donate more to charities; the idea of helping others out is a beautiful desire, but when it comes to actually giving away some of our own hard-earned wages, we end up giving much less than we would like. The average American who earned less than $100k and reported a tax deduction in 2016, had donated less than $3,000. That number is skewed upwards too since this average is based on the average deduction claimed, and thus doesn’t include those who didn’t donate into the average. So the average person who actively donates, donates less than $3,000 annually. https://www.usatoday.com/story/money/taxes/2018/07/06/how-much-average-taxpayer-give-charity-taxes-2018/36561381/
We want to actively contribute, but due to our own personal constraints, it’s quite difficult to contribute much of anything since it has a salient restriction on our household budget and makes keeping up with bills even more difficult. It’s much easier to put it off and resolve to be an active donor in the future; when we pay off our student loans; when we get the next promotion; when the kids are out of the house; when we retire; etc. We continue to put it off to a starting line that keeps being pushed further ahead.
Times like this is when we lament that we didn’t inherit a large sum of money so that we can just build a family foundation and create a family legacy. There’s a wonderful appeal to create an organization that is out there, actively contributing to society that can last beyond our lifetimes. We look at the Gates Foundation, and the many innovative projects they have funded that have helped contribute to disease eradication, or Andrew Carnegie’s foundations that have contributed over $100 million to starting a maintaining many public libraries. These foundations have provided lasting impact, but vast majority of us accept that we won’t ever be in a position to create a family foundation.
The Impact of $20
While we desire to contribute to helping others, most of us are not in a position to make a significant impact. We want to help starving children, but when we see that over 800 million people still are malnourished, we see how minuscule our $20 donation really is. We can give that $20 and it will disappear in an instant, and tomorrow we’ll get another email asking for donations to feed the malnourished.
The problem with our $20 is that it doesn’t carry enough value, thus we should look into two other methods of using that money:
- Extract more value from the $20. We find organizations like Charity: Water that can put 100% of the donation into the field and that $20 can be used to provide a person with clean drinking water for a whole year statistically, or we can wait for a GoFundMe campaign where your $20 is combined with a bunch of other donations towards a specific cause that you help reach completion.
- The other option is to grow the value of that $20. We can take that $20 and leverage it to being $100 or maybe even $1,000.
I have spent a lot of time focusing on that first component over the years, and wrote a lengthy post about how I personally try to stretch the value of my donations https://grantxstorer.com/2016/desensationalized-giving-the-beginning-of-social-investing/, but I’m now looking at the second component and trying to find ways to grow the nominal value as well.
Perpetual Value of $20
What can we do with $20 to grow its impact? What happens when we apply the Perpetual Value Method towards donations? For instance, what if we took that $20, and invested it into a fund and cash out 5% of its value a year from now, while simultaneously continue to invest additional $20 every month into the fund?
That was the initial thought that first sparked this whole concept of perpetual value, but let’s explore this scenario to see what $20/month does to our capacity to donate.
If we were to contribute $20 per month into an investment fund that averaged a consistent 10% growth annually, that would mean after 1 year, we would have contributed a total $240. Since the contributions were staggered, the fund would have grown by $13.41 at the end of the year, bringing the fund total to $253.41. Based on how the perpetual value method, this then allows us to cash out $12.67 at the beginning of year 2 that we can donate.
Sure, $12 is a paltry sum, but so is the $240 as well in the grand scheme of things. If you’ve read my other posts on the concept of perpetual value, then you know the magic starts to take root after a couple of years, so let’s now jump ahead a few years.
The Turning Point
Once we get to year 14, we are still only contributing $20 per month into the fund, but we get to start the year with $247 to donate, along with a fund balance of $4,701. This is where the momentum starts to shift: What we are able to donate in a given year will now exceed what we are putting into the fund, meanwhile the balance of the fund also is exceeding the amount of our total contributions. In that 14th year, we contributed a total of $3,360, but we’ve already been able to donate half of that value, with $1,663 already given to our chosen charities. Not only that, but the fund balance itself is still greater than our contributions with a year-end value of $4,948. If we combined those two numbers, that means we took $3,360 of money we intended on donating, and it turned into $1,663 of actual donations & $4,948 of designated donations, with a present total of $6,611 of value toward charities. We’ve doubled the value that our donations could bring.
It does take considerable time to build momentum, but lets now observe how this continues to escalate over time while still holding our contributions to a simple $20/month.
$240 Turns into $1,000
By year 33, we contributed $240 to the fund, but we get to make a $1,000 donation this year. Think about the significance of that for a moment: your donation this year is essentially being matched 4x by your previous self. Every dollar that you contributed this year is actually worth 4x more and you get to donate $1,000 even though you only had to put out less than $250 this year. This is also not even acknowledging the fact that you over this past 33 years have only put up less than $8,000 of your own money, but have already donated $12,851 to charities, along with a fund balance of over $20,000!
Let’s now jump to your retirement years. Let’s explore what happens if you kept only putting aside $20 per month towards donations over the past 50 years and kept pulling out 5% of the fund balance to use for actually donating to charities.
Over 50 years, your $20 monthly donations now have cost you a total of only $12,000, but in this 50th year, you get to make a over $2,600 in donations of your choosing, while having a fund balance of $52,166. Your $240 annual contribution is now allowing you to donate over 10x the original amount!
But lets also look at your impact over this past 50 years. You put up a total of $12,000 over that time, but you actually got to donate over $42,000 over that time, with $52,166 still left in the fund. Which just think about that for a second: you can keep this going indefinitely, or if you wanted, you could just say screw it, and write one check for $50,000 to your favorite charity if you wanted as well.
All of this was done with a $20 monthly donation.
It may be difficult for us to wait 15+ years before our donations start demonstrating meaningful impact, but again this was all based on the simple $20 monthly donation, which is only 8% of the value that the average donor contributes. I just wanted to show that theoretically, even this minuscule amount of $20 can have a larger impact when we leverage compounding growth along with time to our benevolence.
How about we explore how this concept would work in a more realistic scenario.
Let’s say we started off with just that $20 per month, just to try it out. After that first year we get that simple $12 to donate and we like how this idea works so for year 2 we decide to commit $100 per month. Thus in year 3, we get to make a $76 donation while now having $1,456 left in the fund, so we keep this up for the next year. We then decide we will add an additional $50 per month in our contributions every other year as we continue to get pay raises and have more money available to invest.
This means by year 9, we are now contributing $250 per month, and we get to make a $1,000 donation at the beginning of the year now. The fund now has $20,779 in it at the end of the year, while we contributed $17,040 over that time, and have donated almost $4,000 over that time.
In year 10, we decide to fully commit to this concept and so we commit to donating $100 per week moving forward. From now on, we’ll be contributing $5,200 annually to this fund.
Since we’ve been increasing our contributions, it does delay the time that our actual donations exceed the amount we are putting in, but the nominal value of what we are getting to donate on a yearly basis is more significant now than when it was just the $20 per month.
It takes until year 20 for our donation to exceed $5,200, but in that year, the fund is now worth $65,000 and we have donated over $17,000 on a basis of $48,240 in contributions.
Where this really starts to show though is further down the road. If we’re still contributing $5,200 annually to the fund, and when we fast forward to year 50, we really get to see the impact of this fund.
When we observe what happens in year 50, we are still making $5,200 in contributions to the fund, but we get $42,000 to donate for the year. Now our donations are starting to have significant impact. Think about how much that would affect a non-profit if you gave that all to one organization? Sure, inflation is going to make that $40,000+ donation not worth as much as it is to us today, but it is nonetheless a significant impact now.
But let’s also look at what else is happening to the fund over those past 50 years. Over 50 years, we put up $230,240 of our own money, but over that time we were able to donate just under $650,000. On top of that, the fund itself is now worth $843,237.
Almost $1 million. Do you realize how significant that is? You now have a fund that is purely dedicated to charitable contributions and it’s worth almost $1 million.
This means that if you wanted to, you could just write that huge check of over half a million dollars to your favorite charity and get a scholarship named after you, or you can just continue to ride this out indefinitely. If we still assumed the 10% stable growth, that means that you can actually stop contributing to the fund, and you’ll still be able to make annual donations of almost $50k for the rest of your life, and you can even will this to your children so that they can continue to make donations with this money for the rest of their lives.
Do you realize what happened here? I just described a foundation. You don’t have to become a CEO of a large firm or invent a startup that’ll get bought out by Apple or Amazon in order to start a foundation, but rather just contributing a slightly above average amount towards donations builds momentum into becoming a full-fledged foundation over time.
We all have the capacity of sowing the seeds that will bear tremendous fruit in due time. We can use that for our own personal finance, or we can also use that towards others as well. We shouldn’t be waiting until we’re in the right circumstances to do good, we should be doing the little we can now so that it will become greater.
In the Bible, there’s a great story about when Jesus is preaching to a large crowd of over 5,000 men (women and children not counted). After teaching for a few hours, it became apparent that nobody brought food with them. Instead of ending early, a boy is brought to Jesus with a paltry gift of 5 loaves of bread and 2 small fish. Jesus then performed a miracle that multiplied that resource so that everyone present was fed from this initial resource.
One of the many messages extracted from this story is that we bring what we have, regardless of the quantity it is, and it can still be used for great good. We don’t have to accept the present reality we experience, but we can take a step of faith into a brighter future with increasing positive impact. We don’t have to accept that benevolent foundations are only for the wealthy, but we all have the capacity to take a few loaves and fish and feed the multitudes with what has been given to us.