What is a Reasonable Financial Safety Net for a Charity Entrepreneur
Updated: Dec 9, 2021
Charity entrepreneurship in many ways is a less stable career than a traditional job. Charities in their early days will have limited runways (often under six months). At any point, results could come in showing that an intervention is not worth continuing. On the other hand, value drift is an important consideration. Losing motivation to achieve altruistic impact happens more quickly than one would expect (see Empirical Data on Value Drift and Concrete Ways to Reduce Value Drift). Hence, it is better to donate more to effective causes now than to accumulate a large safety buffer that you might spend ineffectively in the case of value drift. So a question arises: how much personal runway or savings should someone have when becoming a charity entrepreneur?
In the case of any job, people will want enough safety nets to be able to securely transition from one job to another. The first fact to consider is the average length of time between jobs. It’s worth looking at both your past history and the history of similar peers. The second thing to consider is cash-based savings, but there are also many often forgotten safety nets. Monetary savings are only one of them -- often representing a fairly small percentage of a person's overall safety nets. Often when non-financial safety nets are taken into account, everyone's position looks substantially more secure, and thus more confident. Non-financial safety nets are things that exist in a peer group or world outside of a personal bank account, that extend the effective time a person could be unemployed without considerable negative ramifications. Living on a friend’s couch for months wouldn’t be that thrilling, but it would be far from homelessness. Some factors to consider when estimating your current personal runway include:
For those who have a partner, this will often be the first level of safety net. Even if a major event throws your earning ability out the window, often a single earner (particularly in high-earning demographics) can cover the difference.
This is a strategy that likely would work in combination with any others. Few people are cutting expenses as much as they could if the need arises. Certain factors like rent might be hard to quickly change, but food and entertainment budgets are generally a lot more flexible.
Not all families are able or willing to provide long-term support, but many are. Some people, due to having a partner or divorced parents, have multiple plausible families who could help out with things like free rent, and in many crisis situations, most would be more than happy to help for fairly long periods of time.
Some events requiring safety nets might completely destroy one’s effective capacity to work. However, many would just lower the value of the job I would get if I had to find work in a rush due to financial pressure. For example, many people skilled enough to be charity entrepreneurs could get an entry-level job in some industry within a matter of weeks if they needed to.
Not everyone has a group of friends that would be able to give a temporary place to live, or friends wealthy enough to give a loan, but many people do. People from the charity sector, in particular, tend to have more altruistic and high-talent peer groups. In many cases of serious distress, friends can pull a lot of weight.
POSSESSION-BASED SAFETY NETS
Many people own a house, a car, or other assets that can be used as an extra safety net, although not a quickly accessible one, in times of need.
Many individuals have several insurances such as home, car and medical. The point of these insurances is to cover unexpected negative events, although they are category-specific.
GOVERNMENT SAFETY NET
Though not the most prestigious option, many government programs are available for people who experience a sudden shock. The details vary a lot from country to country, but social programs such as employment insurance, welfare and subsidised living exist in many high-income countries.
CREDIT AND LOANS
40% of US households carry credit card debt. Given the high interest rate of 12-15%, spending on credit should only be used as a last resort. Cheaper options for loans include crowdlending online platforms and mortgage providers (if you own a house). In general, debt should be avoided if at all possible. If necessary, look into no- or low-interest loans from family and friends first (see above).
COMBINE THE SAFETY NETS TO GET OPTIMAL PROTECTION
One can imagine combining these resources in different ways and ending up at 12-24 months of safety net or more while having nothing in cash savings. These were the ones that came to my mind. Everyone's personal situation will be different, but I think that listing these considerations can generally reduce anxiety around savings buffers. I expect individual charity entrepreneurs who apply consideration to their full scope of resources would generally feel more confident donating or taking on ambitious projects without large savings buffers.