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The title says it all really, but to get the discussion going let's imagine the following simplified reality:

Suppose John is 25 years old, lives in the UK, has a very secure job with a take-home salary of ~£2,000 and will continue to do this job with this salary (suppose there is no inflation) for the rest of his life with him dying at 70. He lives very frugally, only spending an average of £1,000 a month. This includes all the expenses, including a rent for a small studio flat (say ~£500) and envisions not changing his habits at all until the day he dies (unless he's forced due to, say, illness). On top of that he has about £30,000 saved up and hopes to get a mortgage to buy a property worth ~£150,000. Let's also say that the life on planet Earth will continue 'as normal' for at least another few hundreds of years.

It is John's desire to donate to charity as much as possible, but in a frugal way. Here frugal refers to two aspects: (1) making sure the donations do not put his personal finances in any jeopardy, (2) donating as much as possible. What are some tips on doing so in his or similar situation?

One thing that comes to mind is that he should probably get a mortgage as soon as possible and pay it off as soon as possible. At current rates his monthly mortgage payment on a standard 25-year mortgage would be also ~£500. This way in the long term he saves up on rent, which can go to charitable causes. It probably does not make any sense to do any charitable donations while paying off the mortgage, as it is better to use that money to pay it off more quickly, saving a lot on interest, which can the be donated. By regularly overpaying by £1,000, possible in his situation, John can pay it off in full in about 7 years, saving ~£16,000 in interest, which can again be spent on charitable causes.

But following this logic to an extreme, it seems that the best way to achieve (1) and (2) is for John not to donate to any charities during his lifetime, but rather save as much as possible, invest it soundly (buy a property, then set up an index fund) and then pass it on to charitable causes in his will. That way, if any sudden financial difficulties occur (e.g. due to illness), then he still has all the savings to use if needed and the money can grow (e.g. through the relative savings as with the quicker paying off of the mortgage outlined above). A truly extreme example I suppose is to set up a charitable fund that is to be left operating after his death to keep on growing and then spending on the charitable causes from the yearly increases.

In real life of course there are other things to consider. Inflation should be somehow taken into account and also the possibility of being laid off or of a change of circumstances (say starting a family), not to mention the fact that in 45 years human race can be nearly wiped out due to some ecological or atomic disaster. Then there are taxes and tax relief for charitable donations. What is the practical middle ground here? I would appreciate any tips on approaching this, even if only entertaining the thought of the simplified reality described here. Thanks!

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    I am debating whether this should have a UK tag. The tax structures around mortgages and charitable giving are UK-specific, but the question could garner good valuable answers from people outside the UK, who might be less likely to read it if it was tagged. – Vicky Apr 26 at 9:34
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I would say that it would be worth you reading up on Effective Altruism (Wikipedia or here) as it feels as though the aims are similar.

If you are trying to weigh up the benefit to a charity of a certain donation now, versus the potential of a larger (or smaller) donation in the future, most charities would opt for the certain donation now; although regular donations rather than one-offs are typically the most helpful to charities in allowing them to plan their activities. (Source: things that charities have told me when I have asked similar questions).

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Why get a mortgage? If he could get compound interest of perhaps 2% per month on his savings, he could invest £1000p/m for ten years and have £500,000 to buy a house outright.

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  • Where on earth would you get 2% per month interest?! – Vicky Apr 26 at 9:32
  • With some careful planning you could easily get that level of interest from investing in markets. Just look at the increase in gold prices over the past 30 years. – LAM Apr 26 at 13:08
  • @LAM I don't think any amount of careful planning is going to get you 2% per month, without taking large risks with your money. You would need a time machine so you could go back in time by 30 years to tell yourself what to invest in. – Simon B Apr 26 at 19:54

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