Giving Later in Life: Giving More
I have recently made my first major donation to an EA cause. I have been very convinced by the EA argument for several years, but up until this point I have only made small donations, averaging maybe .5% of my income. This is despite me being older and wealthier than a lot of my EA peers, who have been making substantially higher donations in proportion to their income. It was a deliberate decision on my part to delay my serious giving, as I felt that the best way to maximize both my own utility and my contribution to the world was by giving more later in life, having first consolidated my own financial security. I would like to give a brief explanation of why I hold this view.
I see financial life essentially as a race. We are born and temporarily given a place to live (generally our parents house). We are dependent on others to provide for our daily needs and our education until we enter the workforce. Once we start working, we pay our own way, including for the cost of accommodation. We can then choose to save to purchase our own property, to avoid having to rent. Generally, once we have made such a purchase, we are only a couple of years away from considering starting a family. The cycle renews at this point but we are in a different role, now we are doing much of the supporting for our children. During this period our costs are much higher than they would be we did not have kids. You need to buy more food, require bigger living space, holidays are more expensive… the list goes on and on. Once the kids reach an age where they become financially independent, our costs of living drop substantially, this usually occurs somewhere between 5 and 10 years before our own retirement, at which point our income will also fall.
From my experience and listening to those around me, it feels like the race is quite uneven depending on whether you are ‘ahead’ or ‘behind’ the pack. There are any number of analogies you can use here, but the point is that if you get ahead early, it can feel like you are riding the crest of a wave or out for any easy jog—but if you fall behind, it can feel like you are swimming against the current or running while breathing only the dust kicked up by those in front. If this is true, then giving a substantial part of you income (say 10% or more) in the early part of your life is not a good idea. It is counterproductive for both your own life and your total giving.
If we make any kind of reasonable assumptions about renting, house price increases and mortgage repayments, it makes a lot of sense for people to save to purchase their own home as soon as possible. Once you own your home you are protected from future increases in house prices and rents. I also think it’s a good idea to have a reasonable amount of savings to cover emergencies or large expected costs (such as college education or retirement). Once you have achieved these levels of wealth accumulation, you will be in a much better position to donate money. If you accept this argument, then it is counterproductive to make substantial donations to charities until you reach this level of financial security.
I have nothing but respect for the people whom I have spoken to within the EA community, who make serious lifestyle choices to allow themselves to donate large proportions of their incomes, but I’m suggesting that not only is there an easier way (by securing one’s own financial situation first) but that this way will be more constructive in the long run. To be clear, this approach works regardless of your spending level relative to your income level. So if you want to only spend half of what you earn, and you are currently saving half of the surplus and giving half away, you would still be better off saving all of it, until you are financially secure and then increasing the proportion you give away substantially.
There are risks to this approach—Lifestyle Drift is one, and Value Drift is another. Further, if we believe that there is a high discount rate to EA donations over time, as the best interventions steadily get fully funded then this is another factor. Nonetheless, I think this approach is worth more EAs considering—in particular giving away .5% per year (to stay in habit) and having a fixed target (say of home ownership, 6 months living expenses in savings, and well funded retirement plan) after which you plan to substantially increase donation to say 60% of discretionary income.
But there are also risks to the approach of giving substantially from an early age. I would also expect that doing so causes donor burnout, which may be one of the causes of Value Drift that was posted about recently. It’s really hard to give away large sums of money (relative to income) when doing so requires sacrifice. This becomes increasingly true when you are faced with making financial decisions on the part of your children as well as yourself. Whereas, it’s actively enjoyable to give away large sums when you have already covered all of your personal expenses and do not feel like donations are going to have a big impact on your spending choices.
I tried to put together a numerical example for this post, but even with several simplifying assumptions, looking at the financial situation of a household over a 40 year time period becomes too complicated to easily explain in an article such as this. But if anyone wishes to discuss in more detail I would be happy to at least attempt to do so.
I think something to consider when deciding on the time point of giving is not only the investment in your own financial future, but the investment in the cause your donation is contributing towards. A donation today/this decade may have a smaller overall absolute value compared with a delayed plan for donating, but the effect of that donation today compounds over time as well.
For example, giving $1000 to a high impact charity working in extreme poverty cause areas may mean that in 10 years from now a community that benefited has a marked alteration in trajectory. Less malaria disease burden today in their younger members may have substantial further reductions in suffering in a decade, more than a larger donation at that time point might be able to achieve.
Another example is giving money towards high impact research today which may have positive benefits in a decade from now from helping enable a field. The value of starting research earlier, giving it time to produce value, may be much greater than investing a larger amount at a later point in time.
Definitely, I think that the discount rate each of us applies to future donations is an extremely important factor to consider. In fact, I would be in the camp that this discount rate is likely very high—mostly in agreement with the points you have made.
Now that I have reached a point where I can start giving without affecting my life choices, I’m planning on giving away a majority of the balance as soon as I get my hands on it, rather than investing to increase future donations.
I wrote this post a while ago and my thinking has moved on a little since then so I thought it would be worth adding further thoughts as a comment;
1) In the original post I suggest people should save more when they are young rather than give, but I don’t offer an explicit rules based alternative. I think rules based giving makes a lot of sense, and helps to compartmentalize so that we don’t spend time and mental energy weighing up every spending decision we make vs opportunity of EA donation. I now have thought about how to solve this problem in my own life, which is to switch from ‘I aim to donate x% of my income’, to ‘I aim to donate x% of my spending, until I reach level Y, at which point I donate all income above my consumption level’. I like this rule because it is simple and robust from lifestyle creep. If I want to save money for buffer building etc. my EA goals won’t get in the way. However, if I’m willing to pass on saving to spend money now, then I should be willing to donate in proportion.
2) I wish looking back that I had not mentioned the thing about saving for a house. As was mentioned by others in the comments this is a very specific issue and doesn’t apply generally. A much more generalisable point is that savings allow us to take greater risks, especially with our career. I think there are a lot of employers who understand that some of their employees are risk averse and react to this by paying them less. I also think people who are career risk averse do not develop as far or as quickly. From the people I have dealt with in my life so far (which I appreciate is a very small sample), very few seem to get to retirement with the ‘right’ amount of money for their level of consumption. People either have too little or way too much. I think a good use of money is making sure you fall in to that latter category, and once you are confident you’ll end up there start donating to the point that your excess above desired consumption is minimal.
3) The title Giving Later; Giving More has (I think) led many people to conclude that I’m suggesting investing money with a view to donating the original amount plus the investment returns later. This is not at all my point and I am generally of the opinion that the discount rate for donations, especially in the area of global poverty / health is much higher than one could feasibly expect to make by investing. My point is that having a buffer may allow you to have a much more productive (and therefore financially rewarding) life, and therefore the return on investment of this buffer (I believe) is far in excess of this discount rate.
I think this claim is often true if someone wants to stay in the same location—however, that is very expensive for someone’s career.
Considering EA’s focus on ‘having a good career’ for which the willingness to move is important, buying a property seems much less likely to be a good call compared to the average person. Unless being willing to move whenever a better opportunity arises is not something you’re willing to do anyway, of course.
Agreed, though most people naturally settle down at around 30-35, at which point people tend to move much less frequently. Even if you move once every 5 years from this point, I would still say that most of the time it is worth buying vs renting. This in mind I think people younger than this should consider saving to the point where they at least have the option to do this when they reach this point in their lives/careers.
Hey Thomas, I have a spreadsheet to highlight the disparity rather than a source, I can send it to you’d if you like? As an illustrative example though let’s imagine we have a 30 year old person with $50k saved up. They can either donate this to charity and continue to rent, or use it as a deposit (down-payment) to buy the same house, which let’s say is valued at 500k. The numbers will depend by city, but let’s assume mortgage interest rate of 4.5%, rental yield of 3% and an average house price increase of 3% per year.
If you have a 450k mortgage on a 30 year schedule, you will pay a total of $773k in mortgage repayments (450k in capital repayments and 323k in interest) and at the end of the 30 years you will own a house worth $1.21 million. If you choose to rent, you will pay $713k in rental payments over the 30 years and obviously at the end you will not own anything. The most difficult part of this calculation is the amortization schedule for mortgages, but there are websites that will do this work for you such as this one;
http://www.amortization-calc.com/
Does this mean that housing is mispriced? I don’t think so. Firstly there is a huge tax advantage to owning your own house vs renting. This is because you don’t pay any tax on the rent you avoid paying. However, if you buy an investment property under the same terms and rent it out, you will have to pay income tax on the rent received. Second, in my example investors make 6% a year (pre-tax) owning housing in the long run. This compares with 8-10% by owning stocks in the long run. In general property is considered a safer asset than stocks, so a lower return makes sense, but given government bonds usually return 3-4% and they are much safer than property, a return of 6% or even higher seems reasonable.
Do people make a lot of money by investing in housing? This is a separate question to that of inefficiency and the answer is generally yes they do! One of the huge drivers of wealth inequality (Piketty) is that wealthy people have their money invested in long term assets like property and stocks, where the return is 6-10%. Meanwhile most working and middle class people have a substantial amount of their capital sitting in current (checking) and savings accounts earning 0-2%.
Several of your assumptions—for example, about taxes—are country-specific. Property tax for owners, closing costs, and tax breaks for homeowners vary from country to country. You also didn’t include time or money costs from maintenance, which I expect to be substantial. Your core argument—young EAs should build up savings—could be right, but has already been discussed at length. For example, see http://globalprioritiesproject.org/2015/02/give-now-or-later/
Just want to second that interested readers visit Khorton’s very helpful link. It’s a great article with a very helpful decision tree produced by 80,000 Hours & the Global Priorities Project.
Thanks for the link, I hadn’t come across it before and agree it is a very useful analysis of investing vs giving depending on one’s opinions about opportunities for investment and the discount rate applied to future donations. I think this point is related to mine and very useful in it’s own right, but the point I am trying to make also involves personal utility.
I’m worried about the sustainability of giving which requires sacrifice on the part of the donor—which I believe is the path of least resistance for those interested in EA at college and who end up taking the GWWC pledge at that time. I’m trying to communicate that it is possibly, and perhaps even likely, to be more productive to reach a level of wealth at which you can sustain your desired lifestyle and then give large amounts in excess of that level, rather than giving a significant % from the moment you join the workforce.
I agree that tax treatment of property varies from country to country along with several other relevant variables. I only offered an imaginary numerical example for illustrative purposes. My goal is certainly not to convince people to buy property without knowing anything about their circumstances, only to have them consider the possibility that it might be beneficial, and that running the numbers specific to their case is an exercise worth doing.
I think there is fair consensus that providing oneself financial security is desirable before making altruistic efforts (charitable or otherwise) (cf. 80k)
I think the question of whether it is good to give later is more controversial. There is some existing discussion on this topic usually under the heading of ‘giving now versus giving later’ (I particularly like Christiano’s treatment). As Nelson says, there are social rates of return/haste considerations that favour earlier investment. I think received (albeit non-resilient) EA wisdom here is the best opportunities at least give impulses that outstrip typical market returns, and thus holding money to give later is a competitive strategy if one has opportunities to greatly ‘beat the market’.
The main reason why I am glad I waited 12 years before donating in a big way is that I switched from being global poverty focused to animal welfare and then to long term future. So now I believe what I am donating to is many orders of magnitude more cost-effective than what I would have donated to 15 years ago.
Good point. Have you also saved/invested in order to grow the capital you devoted to donations? I plan to do just that, coupled with strategies to avoid value drift.
Yes, I have invested using strategies like this, which have worked out very well. You can also get a tax deduction by donating to a donor advised fund, which can then only be used for charity. But use one like this so you can have investment freedom.