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Charitable Giving

The Economics of Gift Giving Don’t Always Add Up

Think twice before you buy a token gift.

Articles by Betterment Editors

By the Editorial Staff
Betterment Resource Center  |  Published: April 25, 2013

This article focuses on giving gifts to family members. If you’re interested in charitable giving as part of a larger financial plan, learn more about Betterment’s charitable giving service.

Americans love to give gifts. During the peak gift-giving season – the holidays – the average family budget is $749.51. And as wedding and graduation season approaches, many are set to pull out the plastic in honor of others.

But is that money well spent?

Joel Waldfogel thinks not. Waldfogel is the chair of applied economics at the University of Minnesota’s Carlson School of Management, and he has a particular area of interest is the economics of gift giving.

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Waldfogel’s gripe is not with giving, or spending, but with spending badly. His rationale is that if I spend $50 on something, that item is likely worth $50 to me. But if I spend $50 on an item for somebody else, that item might only be worth $30 in value to them – or worse, if I don’t know them well, worthless.

In Waldfogel’s words: this is a bad way to allocate resources. This process, he explains, is economically inefficient: “In the U.S. we spend about $80 billion on holiday gifts and it would be nice to get $80 billion of satisfaction out of it. ”

Seemingly, the takeaway is this: Let’s strive for value for money in gift giving. If you know someone well enough to know what they want, by all means purchase them a gift. But if you’re not so close, perhaps reconsider the token gift.

Waldfogel suggests one alternative – gift cards.

But the problem with gift cards is that balances often remain unused. Two billion dollars in gift cards went unredeemed in 2012. That might work in the retailers’ favor but it’s unlikely what the gift giver had in mind. While cash gifts are sometimes frowned upon, in most cases we are best situated to choose for ourselves. A cash contribution might just be the best gift after all.

Joel Waldfogel thinks so: “The problem with spending on holiday gifts is that the buyers don’t necessarily get something more valuable than the price. And they (the recipients) certainly don’t get something, on average, more valuable than what they could have purchased with the same amount of money.”

It’s important to note that there is value in the act of giving gifts – especially on the part of the gift giver. Studies have shown that people experience greatest levels of happiness when giving to others.

The takeaway? Keep on giving, but be efficient in the gifts you give.

Learn more about Betterment’s charitable giving service here.

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