Joe the Plumber and his Personal Financials

Much has been written about Joe the Plumber and Joe’s concerns to maximize income in order to invest in his business. He correctly sees the need for capital to meet obligations to himself, his family, his business and/or some charity. If we could see his “personal balance sheet,” as advocated in my book Money Wise, we could also see his self-defined obligations to his retirement, to his wife Joy, and to the local hospital among other needs.

In recent meetings with the many charities that I am involved with, there is concern about the ability to accomplish their missions. They fear a number of pledges will not be fulfilled in full or on a timely basis. Their concerns are similar, but not identical, to our friend Joe’s worries.

Both arise due to the lack of financial clarity that comes from an understanding of one’s own personal financial condition but no understanding or sympathy for the party on the other side of their concern.

Based on past experience, people of limited to modest incomes continue to give to charities during periods of financial turmoil. Most continue to contribute each time they attend a religious service. They are using a “pay-as -you-go” strategy keyed off their current income. Historically there has been a very high level of predictability in these flows.

One of the major differences that occur as people move in stages from modest incomes to Ultra High Net Worth (UHNW), is that their lives can now be better described by a “personal balance sheet” than from an income statement. One of the ways to measure where you are in the path to becoming UHNW, is to understand how much of your charitable gift decisions are based on your income statement and how much on a “personal balance sheet.” While “The Good Book” requires tithing, or giving 10% away, few people in today’s world meet that standard. Single digit percentage allocations to charitable gifts are more the norm. Even in today’s crisis of confidence, I suspect that this pattern will continue when total annual giving is below $1,000 to $2,000 per year.

One of the many items to augment a personal balance sheet is a reserve for grants to charities. I am an advocate of a “funded reserve” with its own separate portfolio of investments, with the appropriate short term securities to meet current pledges and longer term instruments to meet longer horizon pledges, perhaps adjusted for inflation.

An augmented personal balance sheet depicts pledges as a liability with the same force on the grantor as any other debt. On the asset side, one of the portfolios is the funded reserve for grants. Much trickier is to measure the “psychic income” derived from feeling good by doing good. Perhaps this measurement can be a below-the-line addition to the combined financial and psychic income results for the year.

What should you, the grantor do in face of the current financial crisis of
confidence? You should first assure the charity in question that you recognize your obligation and you should determine if the organization is able to meet its minimum goals. Has the charity responded to the climate by cutting back expenditures and/or deferring spending?

For your part, deliver as much as possible to meet the charities’ short term absolute needs. An enormous lesson for both the individual grantor and the charity is that both need rainy day funds to cushion sharp, unexpected contractions similar to what we are passing through now. A reasonable starting point for these rainy day funds would be 10% of the expected annual funding, with an agreement to notify the other party when only 5% is left.

Both sides may have to put off work on the new Joseph and Joyce Wing of the local hospital while donors are forced to back to plumbing jobs, making the flow of cash work as well as it can until new supplies arrive.