It almost seems wrong to take a cold, calculating approach to charity, obsessing over a nonprofit's return on investment and overhead costs. But that's just the mentality we need in order to maximize our social impact -- and, along with it, the priceless feeling that we're making the world a better place.
As philanthropy becomes an integral part of many Americans' financial plans, we need to assume the perspective of an investor and make sure we get the most out of every dollar donated.
Act like an investor: Do your research
The $1.5 trillion nonprofit industry works similarly to the for-profit industry, so it's crucial to take an investor's analytical approach to donations. In fact, doing your research is even more important in the nonprofit sector, as you can't simply turn to your broker or financial advisor for guidance. There are a limited number of specialists helping individuals make donations, and this type of service is typically available only to high-net-worth clients.
Ken Sterns, former CEO of National Public Radio, points to the structural flaws in the charity sector in his book With Charity For All. In a 2013 interview with the Fool, Sterns noted that the IRS approved 99.8% of organizations' applications for tax-exempt status, which had created a class of "uncharitable charities" that were either ineffective, harmful, or not even engaged in charitable causes. He states that the average American household, which generously donates $2,700 per year, "spends virtually no time assessing the charities they donate to. They're not investors."
How do we fix this? Start by picking apart nonprofits' goals, their strategies for reaching those goals, and the hard numbers that support their progress. Don't be swayed by big names and compelling narratives, but by efficient and effective use of donor capital.
When analyzing financials, you should compare efficiency ratios, or the percentage of donations that go directly to the mission, rather than overhead or admin. Efficiency ratios can be calculated from an IRS Form 990 (Parts VIII and IX compare revenue versus functional expenses), found on audited financial statements, or provided by the charity itself.
Compare charities' financials with the industry averages, but also realize that a large hospital's expenses will look far different from those of a Mesoamerican history museum. There's a breadth of information and resources available on the Web to help you search and understand nonprofit data. For example, Guidestar's database includes detailed information on all IRS-registered 501(c) organizations across the U.S.
Get the best of both worlds with impact investing
Impact investments are investments in companies and funds meant to generate social benefit and personal financial gains. Impact investing, a form of socially responsible investing (SRI) has seen rapid growth over the past years.
A recent report by Morgan Stanley's Institute for Sustainable Investing evaluated the performance of 10,288 open-end mutual funds and 2,874 separately managed accounts (SMAs) in the U.S. The data concluded that "investing in sustainability has usually met, and often exceeded, the performance of comparable traditional investments. This is on both an absolute and a risk-adjusted basis, across asset classes and over time."
As we enter the age of social entrepreneurship, crowdfunding, and corporate social responsibility, it's easier than ever to seek out impact investments in the form of SRI-friendly ETFs, mutual funds, and individual public companies. Impact investors can search for investments in line with their social and environmental goals on ImpactSpace, a free open-data platform for the global impact market. This thread on Quora is a fantastic starting point for those looking for impact funds, networks and platforms.
Don't forget the tax benefits
Much of what drives Americans' generous charitable giving is altruism -- but let's not forget the IRS incentives that allow us to deduct donations from our taxable income. Claiming deductions lowers the amount of your income that's subject to tax. A $100 donation, translated into a deduction, will "save" an individual in the 35% income tax bracket $35 in taxes. In other words, donating $100 to charity will really only cost that person $65.
Deductions make it more affordable to donate to charity, increasing our ability to drive positive change. Be sure to use the Exempt Organization Select Check to make sure an organization qualifies for the deduction. Also bear in mind that in order to deduct your charitable contributions, you'll have to itemize your deductions, rather than simply taking the standard deduction.
It's clear that in order to maximize the impact of America's large and growing contributions to the charitable sector, we need to change the way we view the charity sector and the means by which we donate. In order to make your dollars stretch, never let down your analytical investor guard, and consider alternative means of making a social impact.