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Personal finance in the Abbey

J Brauer | © Stone Garden Economics

A friend of mine, who is a nun, struggles with how little to consume of her retirement and investment income so as to give as much as possible away for charitable purposes.

My take on this is as follows. One can do only two things with one’s after-tax income: Either one consumes now (“today”) or one saves and consumes later on in life (“tomorrow”). Since donations to charities are a form of consumption, the question is not if and how much to consume or donate today. Instead, the question is when to “consume” the pleasure of making a donation and who is the ultimate consumer of the saved-up funds, oneself or the person or organization that inherits left-over wealth?

If one consumes all of one’s entire monthly net income “today”, economists say that one’s time preference is high; it is skewed toward consumption “today”. One cannot or does not much care about what the future (“tomorrow”) will bring. For example, people who live in highly uncertain times and places—war zones for instance—have little reason to defer consumption from “today” to “tomorrow” for fear of no longer being alive “tomorrow” or that their savings may no longer be available in future. They thus over-consume “today” and necessarily under-invest in their own future (“tomorrow”) such as education, investment in their own small farm operations or small businesses, or simply investment in the financial markets generally. Likewise, younger people with generally smaller incomes necessarily tend to consume more presently and set aside less for the future.

Conversely, people with a low time preference consume very little in the present and defer consumption into the future. They may have “change to spare” or they may be “saving for a rainy day”. Either way, their behavior implies that they have high confidence in their own longevity as well as in the security and the future value of the form in which they hold their savings (e.g., real estate, bonds, stocks, stamp collections).

People with a spiritual vocation presumably also have a low time preference. For my friend, the nun, I therefore feel that she should fulfill her daily needs as she sees fit and save the remainder in a well-diversified, low-cost investment portfolio (future consumption). She should then make out her last will and testament and designate a charity of her choice as the beneficiary. Since the value of the portfolio likely will grow over time, the charity will benefit more in future than it would if it received funds today. The consumption of the funds is simply deferred into the future. Moreover, if there were an uninsured emergency, so long as my friend is alive, she could tap funds to deal with the emergency and still leave the remainder to the charity.

J Brauer is Professor of Economics, James M. Hull College of Business, Georgia Regents University, Augusta, Georgia, USA. He is also a Visiting Professor of Economics at the EBA Program, Department of Economics, Chulalongkorn University, Bangkok, Thailand.

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