Our relationship with money is a very powerful emotional component in our lives. So, too, are our personal values: Our identification of, commitment to, and promotion of those values helps create our personal identity.

You may have strong motivation to promote your values by your using money to create social impact. However, in order to be successful in this regard, it is beneficial to understand two key principles: create balance and understand opportunity.

1. Create balance.

The first step in creating social impact with your money is to have a clear understanding of your personal financial situation. By creating a plan for your short- and long-term financial future, you are creating balance between your personal finances and your social impact goals. You are establishing a structure within which you can make the best decisions about your finances, including decisions about social impact.

With no clear plan for your own financial sufficiency, you create two risks:

• First, the flow of money to your social impact goals may jeopardize your financial security and that of those close to you.
• Second, you may limit or extinguish your future ability to devote money to social impact. In other words, the less successful you are with your personal finances, the fewer opportunities you have to affect social impact with your money in the future.

With structure for your personal finances, you are able to make the best decisions for the use of your money. Those decisions will make you more financially successful in the future, which in turn, creates more opportunity for you to use your money for social impact. Balance equals greater social impact.

2. Understand opportunity.

Creating social impact with money is achieved using two broad strategies — charitable giving and impact investing.

Charitable giving

In its basic form, charitable giving is the donation of money or property to a qualified charity. This is an organization that has been granted tax-exempt status by the IRS and is eligible to receive tax-deductible charitable contributions. (Use this site to verify that a charity is “qualified.”) Property can include financial assets such as mutual funds, stocks and bonds. A gift may be eligible for a federal and/or state income tax deduction.

The Philadelphia area does not lack for charities that create social impact in our region. Use sites such as Charity Navigator or Charity Watch which evaluate and rank organizations for financial health and accountability and transparency.

Giving can also be made to a community foundation, a grantmaking public charity which is dedicated to improving the lives of people in a defined local geographic area. In our area, these foundations include, but are not limited to, The Philadelphia Foundation, the William Penn Foundation and the Community Foundation of South Jersey.

A newish concept in philanthropy is “collective giving,” in which individuals pool their resources and the gift (or grant) decision is made by the collective group. This pooling of resources creates leverage for larger gifts, thus greater social impact. There are approximately 1,600 of these organizations, also called giving circles, nationally. In our area, one collective group is Impact100 Philadelphia, though there are several others.

Impact investing

Investing for social impact today goes by any number of names. The most common are ESG (Environment, Social, Governance), Sustainable, Socially Responsible, Impact. The investor can invest in individual stocks and bonds, in mutual funds, in private equity and in social enterprises.

There is a continuum that exists when evaluating social impact investments. “Do No Harm” is divesting (not investing) in companies, entire industries or funds that create negative social impact. “Make a Difference” is investing in companies that create a positive social impact. “Shareholder Engagement” is investing in order to influence companies to make changes that will result in positive social impact.

The social impact investor has the dual goal of seeking financial and social return for the investment. Here is where balance again comes into play: If the investment fails to provide an adequate financial return, the investor is not maintaining or building wealth. This both jeopardizes personal financial security and limits or eliminates the opportunity, going forward, to use money to create social impact.

In creating an impact investment program, first identify what social values are important to you, such as the environment, education, women’s rights, etc. Next, identify the best strategy for investing to promote those values while enjoying financial returns. A diversified portfolio of mutual funds may be a good option for these dual objectives.

Private investments, both equity and debt, have potential to create significant social impact in focused areas of need. However, these investments can present barriers to entry in the form of high minimum investment, high risk and illiquidity.

Social enterprises offer a hybrid opportunity to create social impact. As an example, the Philadelphia-based Reinvestment Fund is a 33-year-old enterprise focused on improving underserved communities, locally and nationally. The Fund accepts investments at a low minimum, and also charitable donations.

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Greg Aloia, JD, CFP is a registered investment adviser. Information presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments or investment strategies. Investments involve risk and unless otherwise stated, are not guaranteed. Be sure to first consult with a qualified financial adviser and/or tax professional before implementing any strategy discussed herein. Past performance is not indicative of future performance.