Thoughts on Personal Finance for Effective Altruists

By mariushobbhahn @ 2021-01-29T12:48 (+28)

This is a cross-post from my personal blog.

What is this post about?

The question of how to manage your personal finance as an Effective Altruist has been with me since I joined the movement. At some point in time, I was convinced that I should live on Huel and cheap Pasta to maximize the amount of money I am able to donate and at other points, I was convinced that I should save all my money and donate upon my death because of compound interest. However, these beliefs were mostly based on selective information or overprioritized a specific conviction that I had at the time. Therefore, I felt like I had to do more research about the EA financial landscape and think harder about the possible trajectories of my life.

I also think that my reasoning can be helpful to people who are not EAs. You can simply replace all goals related to Effective Altruism in this post with any other.

The result of that thinking is this blog post in which I want to balance the EA principles and responsible financial habits. I also want to make my strategy transparent and hold myself accountable. So if you think that there are flaws in my assumptions or my inference please contact me as this is an important decision that I want to optimize.

Also, don't understand this post as necessary or sufficient conditions to be an Effective Altruist forum post but rather as ideas that you could adapt for your life if they make sense to you and your situation.

TLDR: Spend money to save time, donate money dependent on your career stage, conviction, and degree of long-termism but donate at least a minimal amount to prevent value drift. Then save up the all money you don't spend in a financially responsible manner (e.g. ETFs).

Assumptions

Finding the right split between donating, saving, or spending money is dependent on many different factors. It might be conditional on the stage of your career, e.g. if you are a student or already settled in your dream job. It is conditional on your future trajectory, e.g. if you want to start a company, found a family, or do a nine to five job. It is conditional on the degree to which you think Effective Altruism is true or you want to devote your life to and it seems like it should also be dependent on your degree of belief in long-termism.

An assumption that is very crucial for my logic is that time is more important than money. By that, I mean that the EA movement is currently more in need of human than financial capital and you should be willing to spend money to save time. This is due to two reasons.

EA perspective

Even though 'Earning to Give', i.e. choosing a job with a high salary and donating a large amount, is often used by journalists as an example for an EA career, it is by far not what most EAs do or what 80000 hours would recommend. This position is very clearly stated, for example, in Rob Wiblin's appearance on rationally speaking or by looking at the 80k career guide where one appendix is even named Why first focus on research, policy, and non-profits, rather than earning to give?. Additionally, 80000 hours published a post in 2015 called Why you should focus more on talent gaps not funding gaps which was followed up by a clarification post in 2018. As the title says this post details why 80k values human capital higher than financial capital and my experience is that this belief has strengthened since 2015.

My personal experience from talking to people within the community on EA Globals is that this need for skilled people gets larger the more niche an EA organization becomes. While there might be more people willing to work for more conventional organizations that directly alleviate poverty or improve global health it becomes harder to find people who are willing to work on unconventional causes such as AI-safety or other very long-term S-/X-risks that are additionally skilled enough to do the job. This means that the more niche your topic is, the more money you (or your employer) should be willing to spend to save time. While this opinion has been affirmed in multiple independent conversations, I could not find any written evidence of this trend and am, therefore, slightly more uncertain about it than the previous paragraph.

Age preferences

As a child, you usually have access to very little money but a lot of time. Therefore, at this stage in life, the little pocket money you have saved has a higher significance than wasting time. Once you get older you probably have more money available but also more responsibilities and thus less time. As most adults, on average, accumulate more wealth over their lifetime the utility of money decreases over time where, in contrast, available time decreases, its value increases. Since most adults complain that they don't have enough time to do everything they would want to do there has to be a point between childhood and later adulthood where the value of time becomes larger than that of money. At which point in time the two lines cross are different from person to person and some people might never value their time more than their money but I would argue that it is at some point between finishing school and entering the job market. Once they earn money, most people are willing to spend a lot of it to have high-quality time from which they derive utility. If you just roughly quantify how much money you were willing to spend for having an additional hour per day or week then I predict that most people would realize that they should be more willing to spend money to gain time. I will give more examples below but transportation is a good starter. Younger people are typically willing to sacrifice time to save money and e.g. take a bus whereas older people usually take the high-speed train to save time at the expense of more money.

In conclusion, I think from an EA perspective it is very clear that you should almost always use money to save time and not use time to generate money. But also from a non-EA perspective saving time is more important than money from some point in your life onwards which I believe to be sometime after school but before entering the job market.

From this main premise - that time is more important than money - I want to argue three conclusions.

Spend money to save time

While I find that most people agree with this statement in the abstract their behavior is not aligned with their beliefs. Simple back-of-the-envelope calculations already show that one should be willing to spend more money to save time than one would intuitively find reasonable. Assume, for example, that you value your time at 10€ per hour which is approximately the minimum wage in Germany and a new mattress promises to shorten your sleep to 99% of its previous length at an additional price of 1000€. Then, intuitively this sounds ridiculous. Why would I pay 1000€ for a 1% reduction? But when you do the math you realize that with an average sleep of 8 hours per night, you would save 4.8 minutes per night which is 1752 minutes or 29.2 hours per year. Most mattresses last 8 - 12 years so this seemingly crazy price would have already paid off after three and a half years.

So far I have mostly argued that we should spend money to save time but not how. This will be done in the next sections.

Spend money to unlock productivity

I have written an entire separate blog post on productivity but I want to present a short summary in the following. There are also medium posts by Rob Wiblin and Sam Bowman on things they recommend buying.

Sleep: I have also written a separate blog post on sleep. In short, more expensive and better fitting "equipment", i.e. bed, mattress, blanket, and pillow often lead to a higher quality of sleep. Investing time to find out what type of sleeper you are and, therefore, what kind of equipment you need probably pays off multiple times. Using technology like meditation apps to calm down before sleep or sleep-tracking devices can give you insight into your sleep patterns. I don't think they are a must-have but they are worth looking into and have seen rapid improvements over the last couple of years.

Work environment: Most people spend around 8 hours per working day sitting in front of their computer. Making this experience as productive as possible and reducing the possibility of long-term injuries is key to a sustainable solution. If you are susceptible to back pain or see a risk of a back injury in the future get a good chair. If you are susceptible to wrist pain invest in an ergonomic mouse and keyboard. If you are unable to sit for a long time invest in a desk that is adjustable for height. Under any circumstance get noise-canceling headphones - they are great. Even if buying high quality seems excessively expensive in the beginning a small back-of-the-envelope calculation shows otherwise. Let's say you spend 3000€ on a chair, desk, mouse, and keyboard (which is likely much more than necessary) and it reduces the risk of either wrist or back injury by 50 percent. Not being able to work for one month has the opportunity cost of your salary and greater additional cost to the public health care system. If we assume that you earn twice the minimum wage in your office job you have 20€ * 160 = 3200€ available per month before taxes. A serious back or wrist injury can make you unable to work for much longer than two months which already makes this a worthy investment (I calculate with pre-tax numbers because you can deduct office supplies from your taxes). In any case, your state should send you a medal as you have saved them much more than just 3000€ in costs for your treatment. Additionally, you will get high-quality office equipment at a lower price already and therefore make this trade-off worth even earlier. Furthermore, you should talk to someone who has chronic back pain from bad equipment to make the abstract harm of "chronic pain" salient to your monkey brain. Once you hear an account of what chronic pain actually entails you will probably rush to the next furniture store.

Lighting: A couple of years ago I bought a daylight lamp. This was mostly out of curiosity and I didn't expect much. But I was very wrong and the difference was very noticeable for me from day one. Standard lighting made it hard to focus, gave me slight headaches which prevented me from being productive but also prevented me from sleeping because the color temperature resembled daylight which confused my brain. The daylight lamp improved both directions. I was able to be productive for longer and didn't have any trouble sleeping in. I could literally feel my body getting tired the second I turned the lamp off. I have very sensitive eyes so the effects might not be similar in magnitude if you try a daylight lamp for the first time but some people I know use them or sad-lamps especially during the winter and have reported similar effects. Additionally, it makes sense to turn on the night-mode on your laptop and smartphone. They will also shift the color temperature according to the time of day and thereby make it easier to fall asleep. Out of all the tips getting the right lighting is definitely the most cost-effective one.

Insurances: In retrospect, it's actually pretty weird. I have a good understanding of probabilities, a good understanding of conditional probabilities and I roughly understand how markets work. So I should have known that at the price of a small premium I could have insured myself against a lot of negative and annoying things in life. Most people have insurance for their health care, liability insurance, and insurance for their car. But you can basically ensure yourself against everything such as the inability to work or your belongings. So to prevent the hassle of bad events and time wasted dealing with them, I plan to insure myself for more negative outcomes in the future. 

Small Stuff: Paying a premium to live near your work can save minutes of your commute. Eating out instead of cooking yourself or paying someone to clean can save some hours over a week. You could join a car-sharing app which is a very cheap way of upgrading mobility. The list is very long but it basically comes down to asking yourself where you regularly spend time on something that is not your primary goal and if that task could be outsourced or shortened through money.

Calculate: Do back-of-the-envelope calculations for everything. Looking back, I was much too cautious with my spending and have kept an "I can do without these fancy gadgets"-mentality for far too long. By now I try to do back-of-the-envelope calculations for all larger spending and realized that I should have been more risk-taking all along. Even if the 50€ invested in a daylight lamp turns out not to have any effect on your productivity, they are still worth in expectation.

Spend money to remove annoyances / improve your well-being

In my quest to maximize efficiency I have used a barely working phone for a long time to maximize its cost-effectiveness or slept in an eight-bed hostel room instead of paying a premium and actually getting some quality sleep that night. While this saves money, it maximizes the wrong notion of effectiveness. I should rather have spent money to remove the annoyance of a broken phone that turns itself off and on all the time or improved my well-being the day after the night in the hostel by getting the better room. While this was well-intentioned at the time, as saving money means more potential donations, I was following a suboptimal strategy for the reasons outlined above.

While this might sound a bit ridiculous to some of you, in my experience, there are many, especially newer and younger members of the EA community that share some of my old beliefs. Some students who aren't able to contribute their time to EA causes (yet) think that living on water and bread and donating their money to EA causes is their way to participate in improving the world. To them and myself three years ago I would now say: "Even if I appreciate the intention, please keep your student money. The world needs your time more than your money." This line of thinking can, in my experience, also be found in people who have heard of EA but aren't EAs themselves. Basically whenever I spend money that is not needed for my immediate survival in the presence of a non-EA group of friends I will get some comment along the lines of: "Couldn't you have used this money to buy malaria bednets?", which shows that in the public eye Effective Altruism is still associated mostly with donating money to effective causes rather than spending your time to work on the worlds most important problems.

However, if we agree that time is more important than money we should be willing to use our money for "selfish things" that remove annoyance in our lives or improve our well-being such as investing in good ingredients for cooking, holidays or investing money into your hobbies outside of EA.

Obviously, this spending still has to follow some proportionality. You could buy a private helicopter to save time but the time gain is probably not worth the money. Most of the time you will find 80-20 solutions, i.e. products that get you 80% of the value for 20% of the price like IKEA furniture.

If you follow the above you will probably still spend less money than you have available in total, especially if you don't have to provide for a family (yet). Whether you should donate or save this money I want to discuss in the following.

Donations

How much you donate is up to different circumstances, beliefs and preferences but I think you should donate at least a noticeable amount of your income (e.g. 10% when you have a job or 1% as a student) for the following reasons. Of course, if your circumstances don't allow it, e.g. because you are a single parent, this doesn't apply to you.

Moral Uncertainty: Even if you are very convinced of long-termism like e.g. Will MacAskill you would probably still have some moral uncertainty left and therefore want to hedge against the risk that the short term matters more than you expected. The more short-termist you are the more willing you should be to donate larger parts of your income to alleviate suffering right now. Even if you are 100 percent certain that long-termism is true it still makes sense to donate - just to different organizations. The center on long-term risk probably has a better overview of when and where it makes sense to use money and if that money is supposed to be placed in the most effective way possible to improve the long-term you are with high probability not the best actor to decide where it should go. Update: Some people argued that it doesn't make sense to hedge your bets for donations and I disagree. Especially donations towards long-termist causes have huge uncertainty attached to them and thus the expected value of one option is included within one standard deviation from another option. Thus I would say it does make sense to diversify, especially if one option includes high-impact, low-probability scenarios.

Value Drift: Value drift (sometimes called value creep) describes the process of slowly changing your core values in a way that every small change is unnoticeable but the difference between the first and last step is very large. Consider, for example, Alice who wants to do Earning to Give because she belongs to the very small group of people for whom this is the optimal way of helping. She starts her new job as a trader and none of her colleagues are EAs and they are very hedonistic. The new colleagues regularly dine at fancy and expensive restaurants and always ask Alice to join. While she first hesitates and doesn't want to spend that much money on food it is still important to keep a good relationship with your colleagues and they might take it personally if she didn't join. The colleagues turn out to be quite nice and Alice becomes friends with them. They start to invite her to their trips over the weekends. In the beginning, she is deterred by the high expenses per trip but is then persuaded to join them on a helicopter ski-trip in the Rocky Mountains. The untouched snow, the landscape, and the group of friends turn this into a very nice and memorable experience. Similar trips and holidays follow. One time they do a safari together and another time they do high sea fishing. While she had a very bad feeling in the beginning because all of these trips mean she donates less to effective charities she starts to rationalize these habits over time - it's important to have friends after all and sometimes you are allowed to have fun in life, aren't you? The more she works at the hedge fund the more her social bubble shifts from EA academics to business people, bankers, and traders. Her new social bubble always tells her that this entire Earning to Give thing was just a phase and it is her hard-earned money that she should use to treat herself for her success and she donates less and less over the years until she finally stops. Alice would never have consented to that change of values in one step but since it happened gradually over multiple years it never seemed like her values were changing at all. I am honestly pretty scared of value drift because I can envision myself in a similar position as Alice. Setting yourself a certain minimum to donate each year is a possible way to prevent or at least mitigate value drift. Donating a tangible amount will reaffirm your beliefs and make it harder to rationalize these small and continuous changes in your core beliefs.

Taxes & Giving Tuesday: In most countries you are allowed to deduct donations from your taxes up to a certain percentage, e.g. 20% in Germany. Since this means you get part of the money for free you should donate to min-max the donation game as much as possible. If you earn 50k and donate 10k, for example, you will be taxed as if you earned 40k. If you want to become a next-level min-maxer you can donate on Giving Tuesday which is a day in the year at which your donations (up to a threshold) to specific organizations are matched twice or even three times. However, you should check whether donations for Giving Tuesday are not always tax-deductable so you should check that out and then do some quick maths to see what is best. 

Motivating others & Signalling: While it might make sense after contextualization and longer explanation telling people about how donations have huge discrepancies in effectiveness and they should think about changing their donation portfolio seems very hypocritical if you don't donate yourself at all. In my experience, people are often very allergic to what looks like an inconsistency at first glance. Thus, donating a significant amount every year increases your integrity in the perception of others.

Savings

Whether one should save or donate the remaining money (if it even exists) depends on different factors.

It depends on the current stage in one’s career. If you are a student with an uncertain future you should probably save most of the remaining money. If you are working already but you are not sure whether the job is a long-term fit you should save the majority of the remainder. If I was already working in my dream job with a stable salary, I would probably donate most of my remaining income.

It also depends on your expected trajectory. If you consider founding a company in the future or found a family you should put something on the side. If you want to work in a standard job as an employee your financial cushion doesn't need to be as large.

I would recommend to save your money using ETFs. While there might be high-risk high-reward options that have a better expected return than ETFs they usually come with heavy time commitments and by definition carry high uncertainty. Since we have established that time is more important than money and I also expect the downside of losing all of your money to be larger than the upside of being slightly more wealthy it makes more sense to go for the no-brainer option and use an ETF. If you don't want to buy ETFs because they are diversified over many large companies and include 'evil companies' such as weapon manufacturers or fossil fuel companies, you can always choose a green ETF that excludes these options. They might not be perfectly aligned with the EA mentality, e.g. exclude nuclear energy, but they are still better than conventional ETFs or leaving the money in a conventional savings account.

Lastly, I think one should err on the side of caution and rather have a slightly larger cushion than donating the maximal amount. The future always carries some uncertainty and your life could be disrupted by a sudden illness, an accident, or unemployment.

Within the EA community, I have met multiple people who were thinking about doing "Financial Independence and Retiring Early" (FIRE). While I am personally sympathetic to the idea, I would argue that it is inefficient if you want to dedicate your life to EA causes. Some people argue that they would dedicate the time after their early retirement for EA causes but since the vast majority of EA positions are financially sustainable you could do so even earlier without saving for early retirement with some other job. So FIRE only sounds like a reasonable option for me if your personal preference for financial independence is significantly larger than your desire to improve the world in the best possible way.

Conclusions

I have argued for three core ideas for financial strategies if people are convinced of EA. a) EAs should spend money to save time as human capital currently seems more important than financial capital. b) EAs should still donate some tangible amount of their earnings to prevent value drift. c) All remaining money should be saved in a financially responsible way such as ETFs. The split between donations and personal savings is likely dependent on multiple factors such as the strength of your conviction to long-termism, the stage of your career, and many more.

One last note

I would like to thank Jay, Emil and Maria for their feedback.

If you have any feedback regarding anything (i.e. layout or opinions) please tell me in a constructive manner via your preferred means of communication.