WealthForTheWorld invests donations to grow them over time, aiming to donate a larger amount in the future. Which is better: donating directly now or donating a larger amount later?

By saving and investing assets, charitable purposes can be supported with more money in the long term than through direct donations. This assumption is based on the historical observation that the return on money invested in the capital market is greater in the long term than its loss of value due to inflation. For example, from 1970 to 2020, the global stock market averaged an annual return of about 5% after inflation. Thus, money invested in 1970 was worth over ten times its original amount by 2020.

However, this positive long-term capital return on charitable assets is not sufficient to justify preferring this approach over direct donations. The decisive factor is comparing the long-term social impacts (or social returns) of both methods. It's possible that the social return on money donated directly in 1970 could be higher in the long term than the social return on money invested in 1970 and donated in 2020, even if the latter amount is more than ten times larger. For instance, if money donated in 1970 had funded a clean water project preventing illness, the improved health and increased productivity of the community over the decades might result in a higher social return than the same money invested in 1970 and donated 50 years later.

The crucial question, therefore, is: Is the social return of charitable assets overall greater than the social return of directly donated money?

Social returns are more difficult to calculate and compare than financial returns. Reliable data on the long-term impact of philanthropic interventions is often lacking, and there is debate about how to effectively measure and compare social returns.

Despite these challenges, the social return on money invested is likely to be higher than that of direct donations, argues Philip Trammell of the Global Priorities Institute at Oxford University. Trammell writes:

The impact of impatience

Donating directly means giving to a cause that has other funders, such as people in extreme poverty. The main motivation for investing instead of donating to these causes is the belief that people, including the poor, generally save too little. Most people tend to prioritize immediate benefits over future ones or care less about future generations (e.g., their descendants) than about the current generation. This impatience results in more spending now, less saving for the future, and consequently less long-term well-being.

Could there be higher returns on direct donations to non-profits focused on global health?

There is skepticism that the global poor typically have access to investments with returns high and persistent enough to outweigh the benefits of investing first and giving later. If such high-return opportunities existed, there would be incentives for outsiders to invest in these local opportunities, such as local farms. This motivation was behind profitable microlending, which has generally not met expectations.

While individuals in undeveloped regions might have somewhat higher investment opportunities due to local knowledge, it is unlikely that these opportunities consistently surpass equity returns. If money were given today to people in a region that grew faster than equity returns, the region would eventually catch up economically with the rest of the world. At that point, investing in those local opportunities would no longer be as difficult. If local and global investment returns eventually equalize, initially, a dollar invested today might be more valuable than a dollar with interest in the future due to similar returns. However, once this equalization happens, the value comparison changes: giving in 10 years might be less effective than giving today if the region develops quickly, but giving in 20 years could be as effective as giving today, and giving in 30 years could be more beneficial.

Additionally, invested money does not have to be allocated to the same beneficiaries over time. Even if some regions grow rapidly, there will always be other areas where future aid can be more impactful. For example, the Democratic Republic of Congo has a lower real GDP per capita today than in the 1960s, indicating persistent needs that might benefit from future-focused giving.

Adapted from an email conversation with Philip Trammell from the Global Priorities Institute (University of Oxford), edited by WealthForTheWorld.

Philip Trammell provides an extended discussion on this topic and related issues here.

A podcast with Trammell is available here. You can also find a lecture by Trammell on this topic here.

If you find this argument plausible, WealthForTheWorld offers a transparent, non-profit, tax-exempt platform for making donations through long-term investments. If you prefer to donate directly to effective non-profit organizations, we recommend visiting effektiv-spenden.org.

If you have any questions, please do not hesitate to contact us directly