Effective Altruism: Give Back the Way You Invest—Empirically.
Effective Altruism is the simple idea that you can increase the value you give to the world by more thoughtfully applying your resources.
When you invest, your goal is to add value to your future. Effective Altruism comes from the same mental place—adding value to every altruistic act you make.
Effective Altruism may be a philosophy you find useful in your charitable endeavors. If you understand how your gifts will impact the charity’s mission, you may be able to make your giving more effective.
We think of Betterment Charitable Giving—our platform for giving appreciated shares—as one way to help make donations more effectively, because, as a donor, you can save on fees and taxes and potentially give more to charity in total.
We’re taking on the topic of effective altruism today, which like good investing and financial planning, suggests that there are optimal ways to put your resources to work to create value for yourself and for the world. Effective altruists aim to use well-researched evidence to make altruistic choices that are more impactful. Since the season of charitable giving is upon us, we think investors like you may benefit from the financial mindset proposed by effective altruism as you make charitable giving decisions this year.
Investing and effective altruism both focus on maximizing impact.
Behind the concept of investing and effective altruism is a central truth about money—one that feels so simple, we often forget to articulate it: The purpose of money is to create value for its owners and the things they care about.
Money that isn’t used—your cash on hand—is gradually losing value. And while we can mostly blame price inflation for this lost value, there’s also an existential reason your money is losing its value: your limited time.
As human beings, we face a truth that each of us only has a finite amount of time to create value with our money. We only have one lifetime each, and we can never know when that lifetime will end. Even in a world without inflation, if you held $1,000 in cash for 30 years, then you—and the people around you—would likely not experience the value of what that $1,000 could offer throughout those 30 years. Moreover, if you were to face an untimely death, those $1,000 would arguably become valueless to you, and the remaining potential money would be passed to your beneficiaries.
The idea of generating as much value as possible with your money is inherently tied to two main questions: When will you put your money to work once you earn it? And how will use it to generate as much value as possible?
These two questions are underpinning reasons why, in securities-based investing, we suggest that the earlier in life you invest, the more value your money can gain. Yet, the same two questions—when examined in our broader lives—affect much more than our investment choices: They can shape every use of our money—from the products we buy, to the experiences we choose to partake in, to our career choices and the amount of money we give away.
Together, all of these uses of money generate our personal sense of value, and yet, so often, as human beings, we fail to ask ourselves, “Am I maximizing the amount of value I want to generate in my life?”
What is effective altruism?
Effective altruism is the simple idea that you can increase how much value you create by helping others by more thoughtfully applying your resources. The name itself explains the intention: if you are going to use your money (and other resources) to create value for others—i.e. If you’re going to be altruistic— then you should focus on measurable results to extend your money’s impact as far as possible (i.e. become more “effective”). No matter how you give back to society, whether that’s through volunteered time, donated money, or through employment, it makes sense to always choose wisely between competing options to increase your “bang for the buck”—just as you would if you were investing your money.
As an example, the Bill and Melinda Gates Foundation is rooted in the principles of effective altruism, beginning with their motto: “All lives have equal value.” From their perspective, the value they hope to create is in saving the most lives possible, and thus, the Foundation aims to allocate its dollars and effort to save the most lives possible.
To allocate resources properly, the Gates Foundation might consider a scenario like this: How can $1,000 be spent best? Does $1,000 in worker training to increase farm production go further toward saving lives in an underdeveloped country in Sub-saharan Africa (where some live on less than $2 per day), or in the Midwestern U.S.? Based on the evidence they gather, they spend their dollars in the area where they can have the greatest impact.
You may have different views on what you value—as do many who follow effective altruism—but the idea of acting altruistically on what the evidence shows to have greatest impact is what we like about the philosophy. It’s important to be aware of impact tradeoffs and new information; that is the essence of effective giving.
Bringing Effective Altruism Into Your Charitable Plans
To give you an idea of how you might incorporate the philosophy of effective altruism in your plans, try to discern how effective altruism fits into your current way of thinking. I start with the fact that I already think of myself as an optimizer. To me, effective altruism is like an optimization on how I give my time and money to the world; it provides me with a starting point for how to think about altruism and a series of steps for how to act.
As a self-described optimizer, I always look for the most efficient way to do something. Even though I’ve only started learning about effective altruism, I realized that my optimizing nature had already led me to apply some of the same principles. Specifically, I try to do in-depth research prior to making charitable gifts, and I try to find the best ways to give to a specific charity.
For example, I have given to educational causes in poverty-stricken areas of the U.S. through DonorsChoose.org. I chose poverty-stricken areas because I think they need school materials more, but also because they’ll likely get more out of the purchase because their baseline of available materials is lower than in districts that already have more dollars to invest in students each year. I also prefer to back projects that request materials like books and technology because they are more reusable. These choices mean my donations should improve learning (and lives) for kids now and for years to come.
As another example, I also think about the way I give time and money to charity. Some organizations have great access to program-specific funds through grants or corporate sponsorships, but the experts within the organization might tell you that under-resourcing of their core budget is what inhibits their impact or scale. This scenario is particularly common for nonprofit organizations of a smaller size, since in the U.S., there’s a fairly significant gap between the largest organizations and smaller, new charities. In these situations, regularized, recurring donations can be among the most impactful, because recurring giving provides for more reliable, sustainable scale, rather than dealing with continuous cash windfalls.
Effective Altruism as a Perspective on Investing Your Time
Most advocates for effective altruism will tell you that the philosophy doesn’t just apply to donations of cash or assets. They also think about how they spend their time to increase their impact—both as volunteers or in their careers.
When considering their time, effective altruists employ the same careful analysis. With time, however, the impact of dollars and cents converges with choices about lifestyle and vocation. Maybe you are a skilled international negotiator, for instance. It’s possible that working at a civil service organization in a conflict-ridden nation to improve aid supply lines will have a larger impact on the world than giving 10% of your current salary annually to the same organization. On the flip side, maybe you work at a NGO on a small paycheck, but have a highly technical skill set that isn’t being used at that organization. You might be better off working at a larger, for-profit organization that can leverage your skills and pay you more per year, from which you can donate to highly effective charitable causes.
In either case, further questions are bound to emerge for you: Are you really ready to use effective altruism as the main way you prioritize your time and money? Do you have other less altruistic factors to consider? Family perhaps? Your own sense of self-fulfillment? What kind of value are you trying to create with your life? Value to society? Value that you share with family?
These questions are the type that followers of effective altruism grapple with day to day. And while you may not be ready to become an ardent practitioner, you can learn a lot from the perspective. Learn more by visiting effectivealtruism.org, watching this TED talk by effective altruism thought leader Peter Singer, or check out an effective altruism meetup near you (here’s the NYC chapter).
How to Help Increase Your Impact Per Dollar with Betterment
As we explained above, we see a deep connection between the approach to investing Betterment employs and the philosophy of effective altruism. For instance, our focus on tax-efficient investing is specifically born out of our focus on dollar-for-dollar impact and what the evidence shows can actually increase they value investors take home. Market performance will certainly vary, but being smart about tax rules can offer clearer ways of helping you maximize your money.
Betterment offers its Charitable Giving platform (as part of our tax-smart toolkit) to help enable any investor-donor to put more of their dollars to work for charity by reducing how much goes to taxes and by eliminating fees.
What many donors don’t realize is that giving cash to charity when you have appreciated assets means that you miss out on the opportunity to give more by avoiding capital gains taxes. Not an optimal approach if you’re seeking to achieve effective altruism. Through Betterment Charitable Giving, we offer access to a dozen great charities, including GiveWell.org (a charity that carefully vets and directs donations to the most impactful causes) and Against Malaria Foundation, which protects low-income families from one of the largest killers in the world—malaria carrying mosquitos.
Learn more about Betterment Charitable Giving. Long-time Betterment customers with taxable investments can usually give immediately. If you’re new to Betterment, just start investing, and once your account sees long-term capital gains (held for more than one year), you’ll be able to make donations.
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What Charity Navigator’s CEO Thinks about Betterment Charitable Giving
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We know from talking to Betterment customers that holding cash isn’t always intentional; it’s a choice by default—not knowing how, when, or why to put your money to work. We developed Smart Saver to help with that.
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