Endowments: Legacies of Giving and Sustainability

Are you telling the right story and giving your supporters the right opportunities to give? Many high-wealth donors want to create endowment gifts for nonprofits. Endowments gifts for nonprofits can set up your organization to retain financial sustainability for years to come and showcase to donors that your organization to thinking about its future and growth over time.

The Harvard University endowment is currently valued at over 53 billion dollars in the fiscal year 2021, ending in the largest sum in its history. While an incredible school, if you are a small to midsize nonprofit (most nonprofits are, compared to this) you may be wishing that massive pool of funding was disbursed a bit differently.

In fact, most nonprofit leaders would wish that $53B was deployed more evenly. Many hope that some of these funds could be funneled into our organizations that are solving big problems within our local communities. 

Do donors want to give endowments?

One of the biggest hurdles to sustainability for small to mid-size nonprofits is the scarcity mindset and the false idea that donors don’t want to gift endowments. Remember Harvard’s $53B endowments? Do you know of Stanford’s $38B endowments? These higher education institutions (and many, many others) prove that high wealth donors LOVE giving endowments. They are a beautiful thing because endowments create a legacy of giving. It’s one gift that keeps giving for generations to come. It can be named and it can be added to It also grows and can give for generations to come. Donors know that their favorite organizations can count on income potentially everlasting.

The sustainability that endowment gifts could bring to established small to midsize charities in our local communities could be huge. But, what is the problem?  Unfortunately, not all nonprofits are telling the right story. Therefore, they aren’t giving donors the right opportunity to give. There are not many small to midsize nonprofits that have the infrastructure in place to accept endowment gifts which means weeks of accounting, legal, setup, and high fees. Because of this, it deters both donors from giving and nonprofits from accepting, and those gifts keep going to higher education while smaller organizations have to keep asking for the same thing year after year. Let’s change that, shall we? 

What is an endowment?

Understanding endowment gift for nonprofit doesn’t have to be as complicated as it seems! Some of you readers may be thinking, “That sounds easier said than done.” So, let’s break it down!

An endowment is a dedicated source of long-term funding, made up of donated gifts, which supports the mission and work of a philanthropic organization. Each year, a portion of the endowment is paid out as an annual distribution to fund the organization’s work. Any appreciation in excess of this annual distribution is retained in the endowment so it will continue to grow and support future generations. 

Micro-endowments are smaller funds that can still pay for salaries, programs, and scholarships year after year. There is a reason why higher education, donor-advised funds, family offices, foundations, community funds, and even our 401ks are invested – it works. We are simply encouraging more nonprofits to follow similar financial paths that are already in place and considered best practices by those around them.

This may surprise you but many high-wealth donors WANT to give endowment gifts! They want to create sustainability and a legacy of giving from their wealth. More nonprofits just have to tell the right story and invite them into the opportunity. Storytelling is so important to this giving and receiving process. It is essential that you take the time to have a strong mission and vision statement, an impactful story full of emotion and data, and a pitch that will wow your donors. 

How to get started

Not sure how to get started? Infinite Giving helps nonprofits easily create their own endowment and helps high wealth donors directly gift unrestricted miro-endowments (and stock shares) to their favorite local charity in about 20 minutes, with no setup cost. They can handle everything else.

Endowment gifts for nonprofits can help secure income that you don’t have to fundraise each year and they help donors create a legacy of giving for their families. Consider asking for the gift of sustainability with a micro-endowment.

This spotlighted blog post is courtesy of Infinite Giving. 

Reserve funds can be a key financial piece of the puzzle as a nonprofit seeks financial resiliency. But what exactly are reserve funds? Simply put, reserve funds are unrestricted funds set aside from normal operating funds for the nonprofit. It’s an organization’s savings account.

Developing healthy reserves is a key financial milestone to building a sound, sustainable organization. It should be one of the first priorities when gaining maturity and moving past the scarcity mindset. Reserves are meant for emergencies in which expected income falls through or unexpected expenses hit.

Reserve funds can be set aside from a surplus at the end of a fiscal year, given from a donor, or accrued from the operating budget. But they should be intentionally planned for, just like you would build a savings account for your personal household. Read on to learn more about the benefits of nonprofit reserve funds.

Types of nonprofit reserve funds

When considering a reserve fund for your organization, there are some key points to understand. First, explore the type of reserve fund that will be the best fit. There are generally two main types of reserve funds: operational and capital. While similar, they have distinct purposes.

Operational reserves

Operational reserves are set aside to ensure that the nonprofit can keep monthly operations going. Think payroll, program costs, and normal monthly expenses if there was a shortfall in giving or other emergency challenges (like a pandemic). Standard recommended practice is that a nonprofit should seek to have 9 -12 months of operational reserves set aside. If a nonprofit is able to save more than 12 months, then those funds can be used to start new ventures. Otherwise, use those funds to seed an endowment and create further organizational sustainability.

Capital reserves

Capital reserves are additional funds that are saved and set aside for capital needs of a nonprofit. If you’re a nonprofit with physical assets such as vehicles, buildings, camp properties, etc, capital reserves are for you. By owning or leasing physical property and assets, you often incur capital expenses. This includes repairs and replacements of sometimes large and expensive items. Think A/C units, roofs, carpet or flooring, paint, plumbing issues, parking lot resurfacing, etc. Capital reserves help when these situations arise.

The recommended amount for these capital reserves range depending on your physical assets, but you should be able to plan and prepare for expected replacement costs as well as the unexpected. Many small and medium size nonprofits might just have one reserve fund that would include both operational and capital reserves. However, we advocate for separate funds for increased tracking, budgeting, and transparency.

Where should you keep reserve funds? 

Too often, nonprofits make the mistake of storing these funds in a savings account, money market, or CD. It’s often not the most prudent decision because reserves are usually held for longer periods of time. Plus, inflation can dramatically impact the buying power of your savings. People usually save for retirement not in a savings account, but a 401k because it allows them to hedge against inflation. This also allows them to make market returns that, with compound interest, set you up for long-term success. The same thought process applies to nonprofit reserves.

Banks are not meant for storing long term savings. Savings accounts and money markets average 0.06% returns each year. Inflation is currently 7%.  Let’s do some quick math. $1 million in a savings account with our current inflation rate of 7% means your organization could lose $70,000 of buying power this year.

In a savings account, that money could lose up to a third of its value in just 5 years. Right in time to buy that new HVAC system, right? That’s why reserve funds set your nonprofit up for better success long-term. We recommend placing reserves in a conservative, diversified, and rebalanced portfolio of ETFs and index funds that can bring average annual returns from 5-8%.

Best practices for nonprofit reserve funds:

Now that you have an idea of which type of reserve fund is best and where you should keep it, consider some best practices. It’s essential to put a policy in place so everyone is on the same page. Start by deciding how much money will be set aside in your reserve fund. Then, determine the types of circumstances that will result in assets in your reserve being used and whether there should be any limitations on how the funds are spent. Have a process for deciding if or when to dip into your reserves and when to replenish.

In addition, here are some other best practices:

• Keep 12 months of your organization’s operational budget in your checking account.
• Place 30-60 days of your operational reserves in a money market for emergency savings.
• Invest 9-12 months of your operational reserves in a conservative and diversified portfolio of stocks and bonds.
• Invest capital reserves that you don’t plan to spend in the next 12-18 months in a conservative and diversified portfolio of stocks and bonds.
• Use additional funds to start new ventures, create a growth portfolio, or seed an endowment to build long-term sustainability.

We can help.

Need some assistance setting up reserve funds? Infinite Giving can help. We can create multiple reserve accounts that are conservatively invested and often bring higher returns than savings, money markets, or CDs. Our asset management platform allows you to manage your reserves all in one place, easily create endowments, and receive non cash gifts. You still have complete access to your funds at any time and can easily transfer from your reserves to your checking account when needed.

To be a sustainable organization that can continue to make an impact, start today by building your reserves, hedging against inflation, and growing your giving. We can help.

 

*This spotlighted post is courtesy of Infinite Giving