Werth-It Fundraising Blog

So the new board member said, “We can always dip into the endowment.”

An endowment for a nonprofit is like a trust fund given to a young person.  If they’re smart, they keep the money invested and only use the income from the investments.  But too many nonprofits, like too many young people who inherit significant amounts of money, are likely to blow through it.  They say things like “We need the money now” or “This is for something special.”

A million dollars seems like a lot of money, doesn’t it?  Yet, if you invest it, you can only safely withdraw about $40,000 a year.  How tempting it is, then, when an organization has a million dollars set aside, to use part of that million for something important, or to keep going during the recession.

The problem is that a million dollars can disappear fairly quickly.  Let’s say that a million dollars invested in the market might have lost half its value in the recent stock market drop.  Then let’s say that the organization spends $100,000 a year for five years.  Bingo!  No more endowment.

If, instead, the organization stays invested in the market, and those stocks recover their value, and they keep spending only the dividends, not the invested money, then in a few years, they will be back up to a million dollars.  The difference is in having the discipline to spend $40,000 instead of $100,000, and to not cash out when stocks are down.

The stock market always comes back, no matter how dire things look.  I grew up in the 1970s, when the stock market hit 1,000 and went back to 700 and just stayed there for years.  I was in the local office of Charles Schwab in October, 1987, when the market crashed and lost one-quarter of its value in a day.  It went from 2,300 to 1,700 and it took more than a year to recover.  I remember a couple of years ago when the market was at 14,000, and then when it went to 7,000, and now it’s hovering around 9800 or so.  The market will come back.  But if your organization sells its investments and dips into the endowment, that money will never come back to you.

It’s so easy, especially during the recession, to say you need to withdraw $100,000 a year instead of $40,000 (in this example).  After all, it’s much harder to cut $60,000 worth of staff, and the money is right there.  Some might even argue that the organization won’t be around in five years if the recession keeps going, and how foolish it would be to starve to death when the money is right there.  However, I would argue that it’s better to work hard and fundraise hard than it is to spend money you’re going to need in the future.  A million dollars working for you and making $40,000 a year is better than having to raise $40,000 additional dollars every year: it means your money works for you, not just you working for money.

Yes, fundraising during the recession is hard.  However, organizations that buckle down and do the best fundraising they can do will create stronger, better relationships with donors that will continue to pay off in the future.  Don’t let your endowment lead to laziness right now: that’s not the lesson you want to learn from having money.  Continue to fundraise and follow best practices.

So my advice to an organization with an endowment would be the same as to the young person who inherits money: someone worked hard so you don’t have to work quite as hard.  Keep the money invested.  Keep working for most of your money, and use the dividends your money earns but don’t invade the rest.  This recession won’t go on forever, and you’ll be glad to have that cushion of money adding dividends to you in the future. 

If you have questions about fundraising or if your board of directors needs training in how to fundraise, please write me, Katherine Wertheim, CFRE, at katherine@werth-it.com.