Delayed Gratification? – Choosing When to Donate

Most charities spend money at about the rate at which they take it in, while most foundations pay out just five percent of their assets each year, the legal minimum in the US. Which strategy does more good? The answer matters to you as well as to charitable organizations: you can give away your money soon after you earn it, or you can invest it in a donor-advised fund and allow it to grow for an indefinite amount of time before giving it away. (Donor-advised funds offer tax savings and require that the money be contributed to charity.) The question of whether to give now or later is complicated, so I’ll mention just a few of the considerations involved.

What rate of return can you expect from investing your money? The S&P 500 index, a broad measure of the US stock market, returned seven percent annually from 1950 to 2009 after inflation. At this rate, an investment of $10,000 would grow to about $300,000 over 50 years. But stock-market returns will probably be lower in the future: Jeremy Siegel, the author of Stocks for the Long Run and the foremost enthusiast for investing in stocks, estimates that returns will be 4.5–5.5% in the future. This lower rate of return would cut the expected value of a $10,000 investment after 50 years to $115,000—still a lot more than you started with.

Since it’s reasonable to expect investments in stocks to rise in value over the long term, why not delay your giving? Because there are benefits to giving now rather than later, though they’re hard to quantify. Firstly, it is often cheaper to stop the growth of social problems than it is to deal with their consequences. For example, it’s better to spend money on disease monitoring now than it would be to invest the money and use it to control a full-scale pandemic. Another example is deworming children in developing countries, which increases school attendance and so increases the children’s later economic productivity. Secondly, donating to organizations (especially those that focus on influencing people) can help them reach more people and raise even more money.

The effectiveness of future charities could be higher or lower. Research into the cost-effectiveness of charities and interventions (such as that done by GiveWell and the Poverty Action Lab) will continue to improve, allowing donors and charities to direct their resources to more-effective organizations and interventions. Against this consideration, health indicators in the developing world are improving (from 1990 to 2008, the child-mortality rate declined by a quarter). As more highly cost-effective health-care measures are provided in the developing world, the cost of further improvements in health will increase. A similar phenomenon could occur to a much greater degree for less visible issues such as farmed-animal welfare and threats to the survival of humanity. If these issues capture the public’s imagination and attract much more funding, the marginal impact of donations will decline.

There are two broad conclusions to draw from this. First, if your goal is to make the most of your charitable donations, you need to consider when you’re going to make money, not just how much you’re going to make—other things being equal, sooner is better. Secondly, if you’ve made your mind up about what organization to give to, you should probably contribute now rather than later. You can’t wait forever; in the long run we are all dead. If you wait, the problems you’re worried about could intensify and become more difficult to solve, or they could be solved without your help (a good thing, but what are you going to do with all your money?).

A final caveat: if you haven’t investigated which charity to give to, the social or financial rate of return is insignificant compared with the increased effectiveness you can expect your donations to have if you were to spend some time investigating the issues. The disparity between the average charity and the most effective charity is large, so it’s better to give to the right charity later than the wrong charity soon.