At this time of year, most of us feel the need to give back, and we do: 40 percent of charitable donations are made in the last three weeks of the year, according to Consumer Reports. But not all of the charities we give to are good bets. Some charities go bad... really bad.
Consider the Kanye West Foundation, which was started with the mission of giving low-income students access to music production programs to lower dropout rates. A great idea, to be sure, but one with despicable motives.
Over its first three years, from 2008 to 2010, the foundation raised $1.09 million. But here's the bad part: only $7,695 of that went to actual grants or donations. According to their financials, the rest went to salaries, travel, events, and whatever else Kanye and friends wanted to do under his charity's name.
Unfortunately, Kanye's not the only one misusing charities. More than a few charities have very little to do with the causes they claim to champion, others are just poorly managed, and some fall into both categories. In any case, these lackluster charities represent a bad investment for those who want to give back. Unless you do your homework on the charities you give to, you could end up paying for lavish fundraisers, instead of forwarding the causes you care about.
Fortunately, there are some clear signs that a charity isn't a good investment of your hard-earned dollars. You can avoid these and ensure that your money goes to a trustworthy charity by abiding by these three guidelines:
Charities are required to report their finances, with the exception of those from religious organizations, and these numbers are made public. If a charity isn't putting their money into the causes they claim to serve, you can tell by looking at a little item called 'program expenses' on their financial statement. Program expenses is how much money they spend in total on programs or grants for their supposed causes. Comparing program expenses to total expenses will tell you where their true priorities lie.
For example, in 2012, the Children's Charity Fund received $920,501 in contributions, gifts, and grants, according to watchdog Charity Navigator. Strangely, however, only $57K of that was used on programs. The rest was lumped under fundraising and administrative expenses, meaning only 6 percent of their budget went into helping those they say they're helping.
Consider that the American Red Cross spends a whopping 90 percent of their budget on program expenses, and you start to see just how bad this is.
Rule of thumb: Avoid giving to charities who spend less than 25 percent of their budget on programs.
No matter how much you care for a friend who is notoriously bad managing his money, you might be hesitant about giving him some cash. You should take the same caution when giving money to charities. No matter how well-meaning they might be, many charities suffer from poor financial management. Agape Villages, for instance, commits 90 percent of their budget to programs, but their net assets are $3.9 million in the red. Unfortunately, a dollar donated to them might very well be a dollar wasted. On the other hand, good charities make every donated dollar count-and it shows on their financial statements.
A good place to start when evaluating a charity's financial health is their fundraising efficiency-how much it costs them to bring in $1 of charitable contributions. The best-run charities will spend mere pennies for every dollar they bring in. The worst will spend more than they bring in.
Rule of thumb: Watch out for charities who spend more than 75 cents to raise a dollar. Also, positive net assets are a sign of a healthy charity; negative net assets means a charity is unsustainable.
Charities aren't exempt from corruption or the desire to keep things to themselves, especially embarrassing things. Yes, some charity CEOs will try to hide exactly how they decided how much they should get paid every year. Yes, charities will get sloppy about creating policies to make sure that proper records are maintained or conflicts of interest don't happen.
It's not that these charities are actually doing bad things, but it sure makes it easier for them to do bad things. On the other hand, when donors can see exactly how charities are running, how they're deciding on important issues, those charities are more likely to use their donations responsibly, ethically, and legally.
Rule of thumb: Make sure the charity you're considering has done their due diligence in providing transparency and oversight. They should have policies addressing conflicts of interest, how their records are managed, how CEO pay is determined, donor privacy, and more. Also, their financial audits should be performed by independent accountants.
For all the lackluster charities out there, there are so many great charities that manage their money well and put their funds exactly where they should be-charities that will get the most out of your donations. The Samaritan's Purse, for instance, puts 89 percent of its expenses into programs, is on solid financial footing, and is completely transparent in terms of how its organization is run.
As a consumer, putting on your accountant hat and making sure that your dollars go to trustworthy charities will not only ensure that your money is spent wisely, but it will also help weed out the bad charities.
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