February 24, 2010

Should You Make Charity Contributions While in Debt?

Most households have some form of debt.   Most households give money to charity.   There is some overlap between those groups so there are households that have debts and give money to charity.   46% of households carry a credit card debt according to the Survey of Consumer Finances (either 2004 or 2007).   In 2004 the Center for Philantrhopy found that 68% of households give at least $25 to charity.   If you overlap those two figures then at least as of 2004 about 14% of households carry credit card balances and give money to charity.

Does it make sense to give money to charity while you have a credit card debt?

If you pay interest on your credit card then that is lost money.  When you make charity contributions at the same time you're almost financing your charity giving with your credit card debts.  You could generate more money for the charity by paying off your credit card debts sooner.   Not having to pay the high credit card interest will free up more of your finances which you could then redirect back to your charities.

Lets look at an example:

Lets say you've got a $5000 balance on your credit card at 19% and you make just the $100 monthly minimum payment.   You also give $100 combined to your favorite charities.   Your income is about $60,000 and you are married.   That puts you in the 15% tax bracket.

$100 to credit card and $100 to charity
It will take you 99 months to pay off your credit card at $100 a month.  At the end of the 99 months you would have given your charities $9,900 and gotten $1,485 in lower taxes.

$200 to credit card till its paid off then $200 to charity afterwards
If you pay $200 to your credit card every month then it will be paid off in 32 months.   Then after that you can put your $200 a month into your charities.  After 99 months your charities would get $13,400 total and you'd have $2,010 in lower taxes.

If you pay off your credit card first then your charities will get $3,500 more and you'll save an extra $525 in income taxes.

For you to get the tax break you have to itemize of course.   But even without that paying off the credit card first would still net the charity more in the long run.

Does the Charity need the money now?

Its possible that the charities you give money to would really use / need the money today.   They might prefer to have $100 today than $150 a couple years from now.  I don't really know how most charities look at cash flows and how important having money now is versus having more money later.   If you are worried about the impact on your charities of choice then you might contact them and see if they have a preference.   Send them an email or make a quick phone call.   This is something for the charities in question to answer.  Personally I'd assume that most very large charities would just as soon have more money in the future than less money today as they have large endowments.   Some smaller charities may have more cash flow difficulties and might prefer the money today so they can pay bills and get things accomplished today instead of tomorrow.

Bottom line:  If you have credit card debt and simultaneously make charitable donations then consider paying off your high interest credit cards today so you'll have more money to share with your charities tomorrow.


  1. Side note: Thank you Jim for your comment on FMF. I'm the poster and your comment might have meant more to me (emotionally) than any of the others. I will still look at all of the comments reasonably for any advice that's worthwhile. But I still wanted to say thank you. Oh and the government job, is at a state university. ;-) I'll let you know when I have that promotion :-D
    and my debt is paid off.


  2. I think part of the issue is discipline. My faith asks that I bring a tenth of the FIRST income into the storehouse. That set it above credit cards and everything else. It's not a financial decision, it's a faith decision, a matter of priorities.

    Using your example, if the person actually would give $200 to the charity after 32 months, your numbers are accurate. But most people would take that $200 and blow it.

  3. 95% of my giving to charity is my local church. Every church I know does not have a large endowment but operates on a cash basis month to month. As a member of the church I am expected to tithe and so I do. My personal finances have to be handled after the tithe. I understand the principle in the article but I would not be a good steward or a good member of the church if I ignored my tithe for that length of time.

  4. James,
    Yeah people were a bit too negative over there for my tastes. You're welcome.

    Randy & Barney,
    Yes I certainly see how a personal commitment to religious giving would trump this kind of financial math. I expected this would get that kind of reaction and I totally understand.


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