By Allyn Hughes, CFP®, ChFC®, CLU®
More than 1.5 million not-for-profits organizations in the U.S. are registered with the IRS as charitable 501(c)(3) entities according to the NCCS Business Master File. In 2010 these nonprofits paid 9.3% of all of the wages paid in the U.S. and had revenues of $1.51 trillion (source: The Nonprofit Almanac, 2012).
Each 501(c)(3) organization has its own mission, leadership and primary funders. Some of these are national organizations that attract large amounts of donations and are very financially secure. Others are “bootstrap” organizations that support a very specific (and often very local) cause. Many of these are close to being financially bankrupt and don’t have the resources necessary to achieve the objectives that their creators have developed for them.
According to the Current Population Survey, completed in September 2010, over 25% of Americans volunteer each year.
Deciding which charitable organization to support with your time, treasure or talents can be a difficult choice. We find that most folks manage their charitable giving in a few different ways.
Some work on the boards or as volunteers of one or more organizations and tend to focus both their time and their money to help support those entities.
Others support a religious organization that is important to them. Sometimes they tithe. Other times they make consistent donations of time and money.
Still others try to spread their charitable dollars around. They often support both local and national organizations that either have asked them for a donation, or that provide a service that they think is valuable.
Finally, quite a few support both local and national charitable objectives by participating in fraternal organizations like Lions, Rotary and Masons.
There is no right way to support an organization.
In our experience relatively few people have a specific plan to support charities. They tend to make contributions that are proportional to their level of emotional investment in the objectives of the charity. They worry less about how specifically their money will be spent.
Making good decisions about philanthropy
We look at philanthropy the same way we look at investments. We try to understand how the charitable organization is managed, determine what its goals are and better understand how the contribution will be used.
Here are the three questions that we ask when making a donation:
- How financially healthy is the charity? To determine this go on to the web and download IRS Form 990 for the charity. The IRS requires each charitable organization to complete form 990 each year. It contains a lot of useful information—the charity’s goals, its income and expenses for the previous year, its leadership and board members and the expenses associated with managing the assets of the charity.
- How has the charity spent its donation in the past? The easiest way to determine this is to ask the executive director or lead fundraiser for the charity about how donations have been spent. Were they used to pay the overhead of the management and the fundraisers at the organization? Were they used to fund one or more specific programs? Try to determine the efficiency level of the fundraising efforts for the entity.
- How (likely) will my donation be spent? We always try to figure out if a donation will be spent on a specific expense associated with achieving the charity’s mission or if the money will go toward an endowment fund that the charity manages.
Spending the time to get the answers to these three questions will give you a much better idea of the strengths and weaknesses of a charity so you are comfortable that your money is being spent wisely.
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