Dear Clients & Friends of Cornerstone:
Many of our clients like to contribute to charitable causes toward the end of the year. With the holidays fast approaching, we thought this month’s article was a great resource to help you donate wisely. In addition to listing the five areas you should consider before you donate, it also provides links where you can research the charities you want to support. You will learn to spot which charities use a high percentage of their donations to support programs and services, and which ones do not. With this knowledge, you can insure that your donations are used in the manner you intended.
If you would like to refer back to any previous newsletters we have published, you can find them on our website. Please be sure to visit www.ccadvisors.com.
– Cornerstone Capital Advisors
Five Things You Should Check Before Donating to a Charity
by Katharine Paljug on July 7, 2015
When you give to a charity, where does your money actually go? It’s hard to remember to ask that question, especially when you’re face to face with pictures of infant cancer survivors or images of flood-ravaged communities. But no matter how important or impressive a charity sounds, it can still misuse funds.
For example, the Wounded Warrior Project, a charity that provides support services, education, and counseling to veterans, came under fire for the lavish amounts it spends on fundraising and the high salaries of its employees. More recently, the FTC filed charges against four cancer charities for defrauding contributors of more than $187 million.
All that bad press can make it seems like it’s impossible to donate wisely. But rather than stop giving entirely, the better response is to take some time to learn about a charity before you donate.
After all, if you were opening a new bank account or buying into a new mutual fund, you would research the institution you are entrusting your money to. Donating to a charity should be no different. Here are five things you should check before you pull out your credit card.
How much goes to the charity
Have you ever gotten calls soliciting donations to charities? While these specialized telemarketers may be volunteers or employees of the organization, more often they are professional fundraisers hired by the charity in question. They don’t work for free: a portion of whatever you donate goes to them, while the remainder goes to the charity itself.
If you do give money over the phone, be sure to ask what percentage of your contribution goes directly to the charity. Professional fundraisers are legally required to share this information with you. Even better, though, you can skip the middleman and donate directly to the charity itself.
Money spent on overhead
No charity will use 100% of donations for services and programs because all charities have some expenses. Rent and utilities have to be paid, employees need salaries, cars and trucks need gas, volunteers need to be fed…all those expenses add up, and the operating budget that supplies them comes out of donations. However, most charities should allocate about 75% of their funds to programs and services, leaving only 25% for overhead expenses. Before you give to a charity, it’s important to look at its finances and see how closely it aligns with the 75-25 rule.
Websites like Charity Navigator allow you to research charities’ financial reports to get a sense of what portion of their money is spent on services and programs versus what is spent on salaries, fundraising, and other overhead. You can also see how a charity spends its money by looking at their IRS form 990, which the IRS requires most nonprofits to make public. The GuideStar website lets you browse the 990 reports of hundreds of nonprofit agencies and charities.
Complaints and negative press coverage
Do a quick news search and see if the charity you are considering has recently received any bad press. Look for warning signs like mismanagement of funds, lack of transparency, or unfavorable FTC reports.
You can also check with organizations like the Better Business Bureau’s Wise Giving Alliance, which investigates complaints filed against both national and local charities. The results of these investigations are included in their charity reports, while standout information is listed on the News & Updates section of the website.
Role and value of in-kind donations
Donating goods or services, known as gifts in kind or in-kind donation, is an appealing way to contribute to a charity when you don’t have a lot of cash on hand. However, it’s important to understand the value of those goods and how they are going to be used.
Not all thrift stores or donation drop-boxes are actually affiliated with charities, even if they have charitable-sounding names, so make sure you investigate any affiliations thoroughly and understand how those goods will be used. Will they be sold to raise money? Taken directly to those in need? Recycled? Make sure the use of the goods is something you feel comfortable contributing to.
It’s also important to understand how a charity values in-kind donations. One of the charges brought against the four cancer charities by the FTC was that they artificially inflated the value of in-kind donations. This let them report falsely high numbers in their financial statements, and led donors to believe that more money was going to charitable programs than was actually donated.
Services and programs
Finally, and probably most importantly, you need to check how the charity actually works. What goods, services, or programs do they provide? How do they achieve their goals?
For example, if a charity claims to be serving the homeless, you should know exactly how they do that before you donate. Do they provide food and shelter? Job training or educational services? Childcare or housing? Do they work nationally or locally? Do they offer equal services to everyone who needs them, or do they only serve specific ethnic groups or genders?
One set of answers is not necessarily better than the other — you might want to support any, all, or none of the above activities. The important thing is to know exactly what you are supporting with your goods, time, and money — then decide if you are ready to contribute.