Smart Money Podcast: Charitable Giving, and Using Savings to Pay Student Loans

Liz: Welcome to the NerdWallet Smart Money podcast, where we answer your personal finance questions and help you feel a little smarter about what you do with your money. I'm Liz Weston.

Sean: And I'm Sean Pyles. Here's the deal, you know that you have questions about how to manage your money, and we are here to help you answer them. Call or text us on the Nerd hotline at 901-730-6373. That's 901-730-NERD, or email us at [email protected] and our team of Nerds will get busy answering your questions.

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Sean: This episode, Liz and I answer a listener's money question about how to pay off student loans right now. But first, in our This Week in Your Money segment we're talking about how to make your holiday charitable donations go further.

Liz: This was inspired by a recent column from our fellow Nerd, Amrita Jayakumar, titled “Be Effective With Your Generosity in 2020.” Since we're now in the middle of the season of giving, we wanted to discuss her insights so you can make the most of your charitable contributions.

Sean: And we're also approaching the end of the year, which means that from a tax perspective, now is the time to get in all of your end-of-year donations.

Liz: Most people can't itemize anymore, but thanks to the CARES Act, everybody can write off $300 in charitable donations, even if you don't itemize. Basically, I think everybody who can should do that, and it's a nice little tax bonus for being generous.

Sean: Right. Just make sure that at the end of the year you have all of your receipts together so that you can take care of this when it comes time to file your taxes.

Liz: Oh yeah, no more shoeboxes.

Sean: I feel like I have a virtual shoebox of my inbox where I just keep all of these receipts, and eventually I'm going to pull them all out and get them organized. So, we'll see.

Liz: Everybody has to have goals, right?

Sean: Yeah. One thing that I'm trying to figure out as I enter my end-of-year giving right now is the best way to direct my donations, because this past year, I think I've been maybe a little bit scattered in how I've donated because there have been just so many different causes that have needed our help. Amrita phrased it really well. She said, "In a year like 2020, choosing where to direct your dollars is like picking your favorite child."

Liz: Yes. Oh, that's a great phrase.

Sean: Right. Because there are, again, just so many places and people that do need assistance right now. And I felt OK putting $50 here or $20 there for different causes that need money in that moment, but that's not how all people approach their giving.

Liz: And there's some real downsides to doing it scattershot. One of the big ones is that you may not be taking time to check out these charities, and not every charity is a good charity. Some of them aren't even charities, they're scams. So you do want to use watchdogs, like Charity Navigator or GuideStar, to find out a) if it's a real nonprofit charity, and b) how they use their money. You want most of the money to be going towards supporting the good cause, not towards executive pay and fundraising and things like that.

Sean: Especially this time of year, some organizations try to play off of our impulsive generosity by maybe ringing a bell in your face at the grocery store. But we know that not all of these organizations uphold the values of generosity that you might expect. So it really is worth digging into the organizations and seeing 1) where the money goes, and 2) whether they have any policies that might actually contradict the things that you want to uphold.

Liz: The other part of this is that it takes money to process money. In other words, when you give your donation, there's some sort of a processing charge, an administrative fee to take your donation. And if you’re scattershot, basically more of your money's being eaten up by those processing charges. So concentrating your giving on a few charities that you've checked out really is a better way to go about it than to just sort of hand out money to everybody who asks.

Sean: I know that that is technically correct and I think that is important to cover these processing charges, especially when you're prompted to — it makes it really easy and it makes it so that the organizations aren't left with a big bill that just goes to a credit card company, for example. But at the same time, I still like supporting smaller charities. I am really torn between knowing that if I do a single $300 donation to one organization, it may go further for that cause. And also knowing that there are so many people that need so much help, that I still kind of want to do that somewhat scattershot approach. How are you balancing that, Liz?

Liz: I struggle with the same thing, Sean. It's really hard for me to say no. But I do know intellectually I want my money to support the causes I care about most. One of the things that we do at the end of the year is sort of sit down and look to see if we've lived up to our self-imposed goals about how much we want to give, and we also figure out what we want to do in the next year. And I'm a huge fan of monthly contributions. They're so much better for the charities because they're predictable, they know what kind of revenue's coming in, they can plan for that. But also it's better for me not to wait until the end of the year and try to scramble up some extra money to give to charities when we've got so many other expenses going on.

Sean: And then you can also factor that into your monthly budget and you can have an anticipated expense versus a spontaneous $100 contribution to a cause that you may not have thought about a month before. So it makes it a little bit more predictable on both sides.

Liz: And if you want to have a pot of money that you just decide you're going to scattershot away, then that makes sense too. That way you're satisfying that urge to be able to give when people ask or when a new cause comes up that you want to support, but the bulk of your money is going towards the charities that you've really spent time checking out

Sean: One way that I've been giving over the past few weeks as I've been doing my holiday shopping is I've been using different apps that will round up to the nearest dollar of a purchase, and there are a few of these. There's Boomerang Giving, Change Up for Charity and Give Tide. These make it really simple so that you can have a charitable contribution without having to put in the time to do your due diligence. They kind of do that for you. And it's not as easily tax-deductible, per se, as giving an intentional donation to an organization, but you're still helping people and that's what this is really all about anyway.

Liz: And the other way you can do this is to give when you're checking out online. For example, there's the Amazon Smile Program. We've used this for years to support our daughter's schools and the money can add up over time. I remember that at her elementary school, it was thousands of dollars a year to support some of the extra programs that came from Amazon Smile. Not from us, we didn't give that much. But it's just a fraction of almost every purchase is going to the good cause. It's really easy to sign up. There's tons of charities to choose from. PayPal Giving Fund is something similar. And then at our local grocery store, it's kind of like the round-up programs that you're talking about. You can choose to give a buck or 5 bucks or 10 bucks. And those grocery store programs actually are doing a pretty good job of getting the money out into the community. So those are all good ways to give.

Sean: One thing I also want to put a pitch in is for Mutual Aid. That's been really big this year, and I mentioned in a recent episode about how there have been little pantries popping up around Portland that I've seen. Anyone who's interested in giving money directly to their community to help people that you know that are right around you, I would recommend they go to mutualaidhub.org. And you can put in your ZIP code, a map will pop up, and on the map, you'll be able to see organizations that you can give money to.

But I have also loved seeing these little pantry icons pop up on the map. I see one right in my neighborhood, and that lets me know that I can go up there and just drop off some food that I'm not going to eat that's in my pantry, and someone who's hungry in my area will be able to access that. We know that charitable contributions aren't just about money, aren't just about getting a tax write-off. It's about truly benefiting people, and this is one of the fastest and cheapest ways to do that.

Liz: That's great. What's the URL?

Sean: It's mutualaidhub.org.

Liz: One thing I wanted to drop in, because people have been politically active this year maybe for the first time, they may not realize that political contributions are not tax-deductible. So if you gave to a political cause, any political action group, things like that, that's not tax-deductible. So keep that in mind. You don't want the IRS coming after you for that.

Sean: Yeah, absolutely. OK. Well, I want to circle back to something that you mentioned earlier, which was thinking about donations for next year, because that's something that I did not really have at the beginning of 2020, a coherent plan for my contributions. I had not ever thought so deeply about how to give money to help causes that I care about as I ever have in 2020. So I'd love to hear how you approach that. Is it a percentage of your income, or do you just have a set dollar amount monthly? How do you think about that with your husband?

Liz: We really do want to make it a percentage of our income and we're kind of struggling towards that goal. I was really inspired by one of the leaders of the financial planning firm that we use because they have regularly given 10% or more of their income to good causes. So that's what we're struggling up to and it really takes something to do that. So for right now we have a bunch of causes that we like to support. Some of it supports good journalism, which is really important to me. My daughter is a huge fan of the Cheetah Conservation Fund. She's been giving contributions to that since she was 3½ years old, so that's part of our giving strategy. And then obviously food banks right now, so important. Basically, we're going to sit down and kind of look at our year-end budget and see how we can do better for next year.

Sean: Well, I'm planning on doing the same thing, so maybe we can touch base on that in the new year.

Liz: Well, why don't we check in regularly and see how we're doing?

Sean: Yeah, let's do that at least quarterly, OK? We can hold each other accountable.

Liz: I like that. Let's have an accountability buddy for charitable contributions.

Sean: Absolutely.

Liz: That sounds great.

Sean: Great.

Liz: Oh, and we should mention, because like our employer, a lot of companies have matching funds, and unfortunately not all of those matching funds get used. So by all means check to see if your company will match your contributions because that's another great way to get some more mileage out of what you give.

Sean: Yeah, I need to do that as well. It's on my end-of-year to-do list, adding up all of my donations, putting them into our company's backend so that they can match my donation, so I can get that double contribution to those causes.

Liz: I think with that, let's get to this episode's money question, which comes from Chris in New York. They say, "Hey guys, love the show. So I'm a fresh graduate last spring into the COVID world. I worked all throughout college and I'm working full time now, but I did take out about $20,000 in student loans. I have $12,000 in a savings account, earning 0.06% interest, which is not great. I also have maxed out my Roth IRA for the year and have $3,500 in an investing account. My question is, should I empty my savings account and pay off most of my student loan debt before the 0% interest period from the CARES Act expires in January? Or should I just pay it off in monthly installments? My naive, idealist thinking is making me worry that the Biden administration may dissolve some student debt and I would have lost some money if I pay off the loans. Looking forward to hearing your response."

Sean: Chris, I am right there with you. I have student loans and I'm also wondering how this potential for student loan forgiveness might impact my plans to pay off my debt or not. So I think that you have a great question that a lot of people are also wondering about as well. So to help us answer Chris's question, on this episode of the pod we are talking once again with credit card Nerd Sara Rathner

Liz: Hi, Sara. Welcome back to the show.

Sara: Hi, thanks for having me back.

Sean: Good to have you, as always. So let's just dive into it. Our listener, Chris, has a question about whether they should use their savings to knock out their student loan debt. What is your initial take?

Sara: So, they mentioned emptying their savings account to pay down their debt. I don't recommend emptying your savings account for pretty much any reason, unless it's a matter of life or death. Literally life or death, not it would be nice to have this debt paid off, because that's not life or death. So you want to have a cash cushion for emergencies, for unexpected expenses. It's just to have like a little bit of padding in case money's tight from one month to another, you lose your job, something goes wrong, you have to fix your car. You need the padding.

Sean: Anything could happen.

Sara: Anything can happen, so you don't want to drain your savings completely because that'll leave you without that protection. And then you might have to take on credit card debt, for example, to fill the gap while you're waiting to earn your next paycheck, and credit card debt is expensive. So you end up just putting yourself back into debt at a higher interest rate just to pay off a little bit more of your student loans. So I don't recommend doing that.

Sean: Yeah, you don't want to put yourself in a situation where you're making decisions about your finances out of a place of desperation and scarcity, so that cash cushion will go a long way to helping so you can have more options if an emergency does pop up.

Sara: And then you start thinking about prioritizing debt repayments. A lot of people, not only do they have a student loan, but they might have credit card debt, or a mortgage, or a car loan at the very same time. And all those loans have different interest rates, so if you're prioritizing what to pay off first or what to pay off more aggressively, that can help you organize your thoughts. What do I prioritize right now and what do I just sort of make minimum payments on for the time being until I have more cash to put toward debt payment in a certain month?

We talk about debt snowball and debt avalanche, so either prioritizing the lowest balance first through the highest interest rate first. Student loan debt, especially federal student loans, is not super high interest compared to other forms of debt. So if you want to preserve your cash flow and still have money in the bank for other bills and obligations, student loans, you could just make the monthly payment, the minimum monthly payment and keep that going. And then if you have extra money in your budget, you could put it toward the principal every month, or even just once in a while to just to kind of shave off how much interest you owe. That's something I did when I was paying off my student loans.

Sean: And that's something that I think is important to talk about as well, because I don't really adhere to the school of thought where it's best to be completely debt-free. Unfortunately, given the way our society and economy works, debt is a fact of life for a lot of people, myself included, with student loans. And I'm not in any hurry to give my student loan issuer any more money than I have, I'd rather use that monthly amount to focus on other things, like investing more, or saving up for a down payment on a house, or things that are higher priority to me than putting money in the pocket of my issuer.

Liz: Well, and as we've discussed before, the money that you give to your student loan lender, you can't get back. So when you're paying down a credit card, you're at least freeing up more credit that you can use again in an emergency. When the money goes to a student loan lender, it's just gone. Which is kind of what Chris is talking about with the prospect of possibly having some of this debt forgiven or erased.

Sara: Yeah. With student loan forbearance during the pandemic that we've been seeing this year, it did make it possible for a lot of people to take the cash they ordinarily would have put into their student loan over several months and maybe put it toward other things. Building up an emergency fund, or paying down another debt more aggressively, or some other financial goal. And that was really helpful, especially with so many people losing their sources of income this year. It is really hard to predict how government regulations will go, I guess. I don't know if I would suggest making decisions based on legislation that hasn't happened yet.

Sean: Yeah, that's true. But at the same time, I'm in the position where I'm going to hold onto as much cash as I can just in the off-chance that this does happen and I do have some of my student loan debt forgiven, because that's money that, again, like you said, Liz, that's money that you can't get back.

Liz: You do have to think about the process that needs to happen for any debt to get forgiven. There's a possibility that Biden could use an executive action to forgive some of it. Maybe it would go through Congress, but that would only happen if the Senate flips — you know, the races in Georgia go the Democrats' way. So there's a lot of moving parts that have to be settled before we know what's going to happen. So I think being a little conservative and not paying off extra debt or extra student loan debt at this point probably makes some sense.

Sean: But one thing I could also see happening is this debt gets forgiven, but then the forgiven amount is counted as taxable income. Which would be no fun, because that seems to be the way of the world. Like, yes, you get something good, but oh yeah, you also owe taxes on it, like the unemployment insurance that people have been getting this past year. One thing I also want to talk about is the other school of thought, which is that it's best to be debt-free no matter what, because debt itself is inherently bad. And some people think that way; it's not my way of thinking. But in that case, it might be someone's priority to pay off all their debt as fast as possible. And Sara, how do you think about the benefits of that?

Sara: I mean, debt's not a person, it doesn't have character traits. It's a financial tool that allows you to purchase really expensive things with money you might not have. And I say this as somebody who just refinanced her mortgage, so I'm in debt up to my eyeballs until 2050. So yeah, debt's really scary, but it also made it possible to have the room that I'm physically sitting in right now. So it's not all bad. The same with a student loan. You're almost gambling on yourself and your job prospects by taking on student debt. You get this education, you hope that those credentials will help you build your career. Then you graduate into an economy that maybe isn't the most conducive to career building. So it's a risk, and it's something that I think every generation has faced. Every generation has had cohorts graduate into really difficult economic situations, and that has really long-lasting effects. I'm an elder millennial, so my cohort graduated into 2008, 2009. Still suffering. So it is scary.

Sean: And then debt can compound that anxiety.

Sara: Absolutely. But at the same time, you can have sort of a healthy view and say that this debt was in service of something that I wanted and needed for my life. Of course Chris is very new in their career, so you're going to reap the benefits of that education over a long period of time in ways that they can't predict right now and I hope the debt was worth it. But I don't like to think of debt as necessarily evil because there are times when you need it.

Sean: But at the same time, I'm sure there are people out there who maybe do have a good amount of cash sitting around. They have that magical six-month emergency fund that everyone wants to have, and they just want to wipe out what they have remaining on their student loan debt, which I think there's a world where that's possible. But for the vast majority of people, they're probably better off just making those regular payments and not getting too hung up on what they owe.

Liz: I think for most people, they have a lot better things to do with their money than to pay down relatively low-rate, tax-deductible debt.

Sara: And like I said, this was something I did. If you have a little bit of extra money in your budget every month, an extra $50 or something, and you want to put it into the principal at your debt, that gives you a psychological boost and it makes you feel motivated to get out of debt eventually. There's nothing wrong with doing that. That letter that you get in the mail, I don't know if you still get it in the mail, I paid off my debt long enough ago that maybe this is done in email now, I have no idea, but that notification you get that tells you that your debt is gone, it's a wonderful day, I'm not going to lie. So I totally understand the motivation to get there as quickly as possible. It's absolutely something to aspire to. If you have it in your monthly budget to throw a little bit of extra money into a debt that's just been keeping you up at night, then do it, because you might not be making the most quote unquote optimal and financial choice, but being able to sleep at night is huge too.

Sean: I'm envious that you got that letter. I'm sure it's an email at this point, so whenever I eventually get that, I'm going to print out two copies and frame one and then burn the other and just bid it farewell.

Sara: When I was paying off my loans, this was right at the cusp of [when] some people got a tiny interest rate discount for paying online, but my loan didn't. So I did do an automatic clearinghouse whatever, like a monthly transfer, but I didn't get half a percent off my interest rate by doing that. And I was so mad that some people got that tiny ... I mean, it was not going to be a huge amount of money.

Sean: Anything counts though.

Sara: It's just the injustice of it all.

Sean: Yeah, absolutely.

Liz: Actually, I wanted to follow up on that, because I heard grumbling about the possibility of student loan cancellation, or forgiveness, or whatever from people who did pay off their student loans. And it's really interesting that we've got this psychological thing that we don't want anyone else to get something that we didn't get. We're envious when somebody else gets something that we don't. I don't know how we work through that.

Sara: I think a lot of our problems as a society would be solved if we stopped being jealous that other people got the things that we wanted or got the things that we already have ourselves, due to perhaps a position of privilege that we're in. And so, I think it is everybody's responsibility to, when you see somebody else struggling, give them your hand. Maybe not literally because of COVID, but metaphorically. It is better if we have the disposable income to spend within the economy, buying houses and going on vacation and supporting all these industries that are struggling right now. My generation isn't buying homes because of our debt. Imagine if we could.

Sean: I mean, if I'm seeing someone go through a struggle that I went through, my first impulse is to help them, not to say, yeah, I hope you enjoy every minute of your suffering, because that just seems oddly selfish. And if people are focused on that selfish standpoint, as you said, Sara, people having more liquid cash on a regular basis helps the broader economy. So I think people should pivot what they're focusing on and maybe make the world a little bit better for everyone else.

Sara: I believe in humanity. We are all good people. We can do this together.

Liz: We can. We can.

Sean: One last thing I wanted to touch on was the fact that Chris has $12,000 sitting in a savings account that has a 0.06% interest rate, which as they pointed out, is not great. And so, I'm sure you guys have some ideas about how folks could maybe get a little bit more from their savings, even if interest rates aren't great right now. What do you guys think?

Sara: The easiest one is definitely moving your money to a high-yield savings account. Shop around, see what's out there, see what sorts of deals and incentives there are. Because that's a really low-lift way to maximize your savings, and it's really great for money that you probably need to tap into in the short term. An emergency fund, or maybe you're saving for a short-term goal, like you know you have to replace your car within the next year or something like that — you're saving up for the down payment on the car. That can be a really great place to stash that money.

Liz: Yeah. Anytime you need to tap into the money, it needs to be somewhere safe, and liquid and just sitting there in its rocking chair waiting for you.

Sean: Well Sara, is there anything else that you think Chris should keep in mind as they try to balance how to pay off their student loan debt and also keep their savings growing?

Sara: So Chris mentioned having $12,000 in savings, which is amazing for somebody who's just out of college and definitely a really nice cushion to start out with. And so, one piece of advice I always give people when they're first starting out is to set specific goals for your short-term savings so it's not just this big amorphous pile of money that doesn't really have a set purpose. So think about how you might want to use this cash, and you can sort of portion it into little buckets in your mind. You might have some money set aside for emergencies, some that you have for debt repayment, and then you might have other fun things you want to do, like travel, maybe save up for a down payment on your first home, buy gifts for your family for the holidays. So think about how you want to divvy up that money and give it all a job.

Liz: That's a great way to put it.

Sean: All right. Well, Sara, thank you so much for joining us.

Sara: Thank you.

Sean: And with that, let's get into our takeaway tips. First up, know how to prioritize your debts. Higher-interest-rate debt should be resolved quickly, but it might be OK to take your time paying off lower-interest-rate debt, like student loans.

Liz: But there are reasons to pay off your debt more quickly. Sometimes the psychological or financial benefit of being debt-free can be worth the cost.

Sean: And lastly, hold onto and build your savings. In an emergency, you'll be glad to have it.

Liz: And that's all we have for this episode. Do you have a money question of your own? Turn to the Nerds and call or text us your questions at 901-730-6373. That's 901-730-NERD. You can also email us at [email protected]. Also, visit nerdwallet.com/podcast for more info on this episode, and remember to subscribe, rate and review us wherever you're getting this podcast.

Sean: And here is our brief disclaimer, thoughtfully crafted by NerdWallet's legal team. Your questions are answered by knowledgeable and talented finance writers, but we are not financial or investment advisors. This Nerdy info is provided for general educational and entertainment purposes, and may not apply to your specific circumstance.