*Note: Do you own due diligence, and the opinions expressed in this piece are for informational and entertainment purposes only. The math has not been verified by an outside source and it is possible that my calculations are completely wrong.*
I heard on the radio yesterday that there was a new Canadian charity (The R.E.W.A.R.D.S. Foundation) which has been set up that promises to pay kids $5,000 upon graduating from high school if they remain smoke-free. Upon hearing about this new initiative, my reaction was, “Hey, that’s a great idea! Free Money!”. While the website indicated that they are looking for sponsors to foot the bills entirely, in the meantime the program users have to find sponsors who will commit to making donations to the foundation while the student is enrolled. So it is not as great as I initially thought.
There are some conditions however, and after doing some digging I made a note of some points that I think need to be addressed before a program like this really takes off. Students can only enroll when they are in Grades 5, 6, 7, and 8. Based on which grade they are in when they enrol, they have a different amount of sponsor contributions they have to bring in to the program (from the time of enrollment until graduation):
Grade 5: 4 sponsors required contributing $15/month ($60/month total)
Grade 6: 4 sponsors required contributing $20/month ($80/month total)
Grade 7: 4 sponsors required contributing $25/month ($100/month total)
Grade 8: 4 sponsors required contributing $30/month ($120/month total)
Immediately I grabbed my financial calculator to see what kind of interest rates were required to get $5,000 at graduation. What follows are the interest rates required for each enrolment period, assuming that you enrolled at the beginning of those years:
Grade 5: -3.58%
Grade 6: -8.76%
Grade 7: -12.72%
Grade 8: -15.20%
Just in case I lost my ability to use a financial calculator, I decided that an acid test would be to just take the donor contribution amounts required and see what happened if you stuck them under a mattress (or in other words, made 0% on the contributions):
Grade 5: $60/month x 12 months x 8 years @ 0% interest = $5,760
Grade 6: $80/month x 12 months x 7 years @ 0% interest = $6,720
Grade 7: $100/month x 12 months x 6 years @ 0% interest = $7,200
Grade 8: $120/month x 12 months x 5 years @ 0% interest = $7,200
Wow. Okay, according to the rules you are considered to be in your grade until June 30th, so to take full advantage I suppose you could enrol on June 29th of the last year of Grade 8 and you will only have to be in the program for 4 years, in which case:
Grade 8 (end of year): $120/month x 12 months x 4 years @ 0% interest = $5,760.
Now let’s factor in the fact that the contributions to the program are considered charitable contributions. You don’t save that much tax on the first $200 of charitable donations you make, so many people will elect to carry forward the claiming of charitable contributions. Assuming the highest tax bracket, and assuming that you’ve made other charitable contributions such that all funds going into this program are given the greatest tax break would mean that the rates of return on the donations are pretty good on your money when you factor the tax savings.
BUT after looking through the foundation’s website, I have more questions that need addressing:
1. Why the negative return on the money contributed? How expensive is it to run this foundation?
2. The website mentions that the funds are held in a separately managed trust, under the care of a highly credible management firm – doesn’t give the name.
3. The website states that all their accounting will be handled by a highly credible accounting firm, but no name is given for the accountants either.
4. The website states that their financial statements are posted for all to see. There are no links that I found and the charity was established in 2002 from what I can tell.
They also mention that their trust will operate with an assumption of a long term rate of return of 4%. They also would like to have 100,000 children enrolled in the next few months. Based on this we can roughly project the administrative costs (if we assume the surplus is used to cover these expenses).
I won’t get too detailed, so I will assume that all 100,000 students enrolled start at the beginning of Grade 7, therefore they are responsible for bringing in $100/month for 6 years in order to claim their $5,000 upon graduation. So based on a 4% rate of return that the trust expect to achieve, in 6 years time the trust will have accumulated a total of $814,933,056. If all 100,000 students graduate, having been smoke free for the entire program, the trust would have to payout $500,000,000. That leaves $314,933,056 for administrative expenses and program costs. Perhaps there will be a point when the interest earned in the trust will negate the need for signing up donors?
Additionally, it doesn’t say so specifically, but it seems that if a student drops out of the program all the donor’s funds are not refunded – which is fine – I have no problem with that. Suffice it to say, there will not be a 100% success rate, so there will be even more money available in the trust than the $300,000,000 or so calculated.
As you can see, there are some questions that need to be addressed. I’m pretty sure my math is correct, but feel free to offer up your own calculations and let me know if I’m the one who is out in left field here. Helping kids stay smoke free is a noble cause, but I don’t know if this is the proper way to go about it. I think there needs to be more disclosure and some tweaks to the program before it would be something I would sign up for.
Here is the link to the website so that you can do your own digging: www.my5k.ca
Check it out, and I actually hope that you can show me that I’ve made some incorrect assumptions or conclusions so that we can all set the record straight.
I would very much appreciate your comments on this post everyone.
If you like this blog, you might like my book:
RRSPs: The Definitive Book on Registered Retirement Savings Plans