Are the Charities You Support Using Your Money Wisely?

There are more than 1 million public charities in America today and people donated more than $358 billion to them in 2014, about 2 percent of the GDP, according to Charity Navigator. There are several ways that donors can do research to make sure that the money they give is being used efficiently and effectively – and it’s all about doing your homework.

“Everybody should know about the charity that they are giving to and how they are using their money,” says Stephanie Kalivas, an analyst at CharityWatch. “There’s no excuse to not spend a little bit of time doing some research.”

Here are some dos and don’ts for doing due diligence on charities.

DO check out the charity’s rating.

Charity Navigator and CharityWatch are two nonprofit organizations that do a lot of the legwork for donors. When rating charities, both look for 75 percent of an organization’s spending to be on programming, with the remaining 25 percent spent on overhead. Sandra Miniutti, vice president of marketing and chief financial officer at CharityNavigator, suggests reaching out to your favorite charity if it falls below that 75 percent mark, as sometimes there are valid reasons, such as investing in a facility.

The group also takes into account other financial indicators. For example, CharityWatch looks for charities to spend $25 or less for each $100 in funds that they raise. A group’s accountability and transparency also factor in to the ratings.

Direct Relief and the Breast Cancer Research Foundation are examples of charities known for spending their money efficiently and effectively, according to Miniutti. Charity Navigator also publishes many lists that are updated monthly, including “10 of the Best Charities Everyone’s Heard Of” and “10 Charities With the Most Consecutive 4-Star Ratings.” CharityWatch lists Top Rated Charities by category here.

DON’T assume that there is any oversight.

“Most donors have a sense that there is some sort of oversight of charities in our country, and that’s really not the case,” Miniutti says. “At the federal level, it’s the IRS, state level is the attorney general’s office, and they do not have resources to monitor all the nonprofits.” The lack of oversight makes doing your own homework particularly important.

DO look for certain items on the charity’s website.

A charity’s website can reveal a lot about the foundation of the organization.

“Although donors should remember that it is the charity’s self-assessment, a website should have good descriptions of how it is using donors’ money, and it should quantify the impact it is having,” says Kalivas.

A website should also list the charity’s board members, and donors should look for individuals with legitimate experience that benefits the mission. Kalivas says a charity should have at least five independent, unrelated board members. In addition to posting an annual report online, larger charities should also have links to either Form 990 or audited financial statements.

“It’s not difficult or time consuming to flip through these and find the information you need,” says Kalivas. “You can learn a lot with minimal effort.”

DON’T ignore the past.

Look for trends in both revenue and expenses when reviewing a charity’s finances.

“Look at the last few years to see if the organization’s revenue is trending upwards,” says Miniutti. “If it is not growing at the rate of inflation, there could be problems down the line and they may have to look at cutting staff or services.”

DO establish a relationship with a charity.

Not only do the experts recommend getting involved with a charity directly because the best research is often done face-to-face, but charities are often eager to get to know their donors.

Rebeccah Sanders, vice president and executive director of the Chicago Region of the National Audubon Society, explains, “Our donors are our partners, and it’s not just a financial relationship. We want to understand what motivates them and help them support us in a way that best suits them. We want to make sure they are having the impact they want to have.”

DON’T give over the phone.

Miniutti urges people to not give to solicitors requesting money over the phone because charities can lose money on contracts with the for-profit firm making the calls.

“Sometimes they are outright scams, but many times it’s just a super inefficient way to give,” she says. “If you find their appeal compelling, hang up the phone and give to them directly.”

One caveat to this is your alma mater that is using student callers.

DO put it in writing if you want to earmark your donation for a specific use.

If you do not make a specific request, donations go into an unrestricted fund to be used however the charity wishes. If a donor makes a significant contribution and wants it used in a certain manner, they should indicate the intended usage both in the memo of the check and with correspondence included with the check. Also request supporting documentation with an update on the project or showing how the money was spent.

“Charities are often hamstrung with specific gifts from foundations and need general operating support,” says Miniutti, who prefers to let a charity spend as it sees fit.

DON’T go with a new charity when a disaster strikes.

Often people want to give when the need is urgent and there isn’t much time to do research. That’s when it’s best to stick with the known entities.

“We recommend sticking with established groups and bigger charities with a track record of success in times of disaster,” says Miniutti. “A new charity isn’t going to be able to be effective when responding to a major tragedy like terrorist attack or tsunami.”

Some time and research can lead to a meaningful and hopefully long-term relationship with a charitable organization doing meaningful, effective work – one that helps donors make the world a better place.

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