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August 24th, 2010

What Discount Rate do we Apply to Giving?

Giving $1000 to oxfam today would be better than giving $1001 in a year, but $1000 today would probably be worse than $2000 in a year. I'm not sure what the transition point is. $1050? $1100? $1500? There is some amount, which really is the same as an interest rate, at which it would make more sense for us to invest the money and later give to oxfam than to give to them now. The more effective we think oxfam is at creating structural solutions that continue to help people without additional spending, the more important it is to us to give money sooner, and the better an investment would have to be to induce us to chose it instead. Their community finance programs, when working effectively, let people start small businesses and get out of poverty. This affects not just them, but their children and community. So there definitely needs to be some discount rate, because money spent now can have lasting effects.

In considering buying a house, we might defer giving for a while until we've paid off the mortgage. If so, we'd charge ourselves interest on the money we were delaying giving to oxfam. How much interest would that be? If it would be at a rate higher than the current mortgage rate, we would do better to take a longer mortgage (30 year), make just the minimum payments, and give away as much as we could. So what we choose for this discount rate matters some. It also matters because if Julia thinks we chose the rate incorrectly then she might either resist or encourage delaying so oxfam can get more money.

I have no idea how to decide what a good discount rate is. Julia's not sure either. I could ask oxfam.

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