By Peter Mastrantuono
In a year of exceptional hardship, both financially and in personal health, the generosity of Americans has never been more needed. If you are one of the millions of Americans planning to make charitable contributions this year, you’ll want to consider three key criteria for donating to any charitable organization.
- Does the Charity’s Mission Align with Your Personal Values, Passions and Interests?
The range and magnitude of problems that matter to an individual (e.g., poverty, education, arts, natural disasters, the environment, etc.) easily overwhelms his or her resources to address. As a consequence, it’s essential that you think about what is truly important to you.
Being aligned with a charity’s mission not only makes you feel good that your contribution is helping, but it can foster greater involvement with the charity of your choice, for example, through volunteering. This heightened engagement can lead to more sustained impact and greater satisfaction.
Relatedly, you should think about whether you want to fund global charities that address needs far and wide or if you want to help solve problems in your local community.
2. Is the Charity Effective?
This can be difficult to measure as there is dearth of independent research on how effective charities are at accomplishing their stated mission. Absent such evidence, you may want to examine the outcomes to ascertain actual results. For instance, an organization’s effectiveness at abolishing hunger may be unclear, but if it is feeding the hungry that may be sufficient for your support.
3. What is the Financial Efficiency of a Charity?
Perhaps the most important benchmark by which to evaluate a charity is by their efficiency in delivering their programs and services. Put simply, “how much of my donation is going to solve the problem?” After all, you do not want a disproportionate share of your donation paying for elevated administrative expenses or costly fundraising activities.
There are several ways to determine the efficiency of a charity, including:
- The percentage share of annual contributions that go toward non-programmatic spending, such as fundraising and administrative expenses. (This can become tricky when a charity receives significant amounts of non-cash contributions since how they get valued may affect such percentages.)
- The spending levels on programs and services to determine if they are maintaining (or growing) spending—a sign that the charity is continuing to make an impact.
- The allocation of spending is important. For instance, you may want your contribution to feed the hungry, but if a charity is allocating some portion of its spending to education and building awareness—by no means unimportant—it may not meet with your personal preferences.
- Another important financial measure is the level of working capital and its liabilities-to-assets ratio, both of which point to a charity’s ability to sustain its operations.
A good picture of a charity’s financial situation and practices can be gained by reviewing their Form 990, a federal tax report that is publicly available and usually provided by the charity.
If this financial due diligence sounds a bit daunting, there are organizations devoted to evaluating thousands of charities by reviewing tax filings and governance documents, like Guidestar.org and CharityNavigator.org.
It may also be beneficial to work with your financial advisor and tax advisor to develop your giving strategy and keep these important year-end giving considerations in mind.
Peter Mastrantuono is a contributing writer to MyPerfectFinancialAdvisor, the premier matchmaker between investors and advisors. Peter worked for over 30 years in the wealth management industry, focusing on retirement planning, investing, asset allocation and financial planning.