I rubbed my eyes in disbelief. What I was seeing on the screen in front of me didn’t make sense.

I checked the figures again.

$750,000. Three-quarters of a million dollars. Every month. On cars and gas.

That would build a lot of transitional houses, I thought to myself. Five hundred, to be exact, at the current cost sheet. Every month.

Post-earthquake Haiti in 2013 needed those shelters desperately. But my nonprofit employer was spending millions on its own running costs.

Later that week, I learned that the low-cost self-help reconstruction project I’d helped to design for a devastated Port-au-Prince neighborhood was to be deprioritized. We were going to redirect our attention to a project that was far less efficient and effective … but more marketable for the fundraising guys back in the States.

I knew then that my time in the nonprofit sector was at an end.

As you think about donating to hurricane relief efforts, ask yourself: Would you be comfortable seeing 60% of your donation disappear down a black hole … never reaching those in need?

If you don’t apply sound investment principles to your charitable giving, that’s probably what will happen.

Even Bad Giving Feels Good

Do you have any idea how much of the money you donate to charity directly benefits the people you’re trying to help?

Most people have no idea. It’s easy to understand why.

When we invest for profit, the only reward is more dollars and cents. The act of investing is neither here nor there. We feel good when we win and bad when we lose.

Donating to charity, by contrast, is a reward in and of itself. It makes us feel good (and reduces our taxes). But unlike investing, there’s no incentive to pay attention to the “return” in terms of the impact on those you’re trying to help.

That mismatch creates the same scope for inefficiency, waste and self-dealing that we often criticize in the government.

We all know that the government isn’t subject to market forces, so there’s no automatic mechanism to ensure that it’s efficient and effective. That’s why our elected representatives monitor government activity closely — after all, it’s our money!

But few people pay any attention to what happens to their money inside a nonprofit organization.

For some reason, we trust them in a way we’d never do for the government.

Experts at Spending Money

Don’t get me wrong. There are many effective and efficient nongovernmental organizations (NGOs) out there. I worked at some in my years in Africa.

They tend to have the following characteristics:

  • No more than 25% of their outlays go to their own internal costs — salaries, overhead and so on (the “charitable commitment” ratio).
  • They spend 30 cents or less to raise one dollar in donations (“fundraising efficiency”).
  • They do not carry financial surpluses year-to-year.
  • They publish honest and self-critical annual reports with full transparency, including executive salaries.
  • They are regularly audited by external auditors.

These characteristics are especially important for disaster response and relief organizations like those that are soliciting funds for victims of Hurricanes Harvey and Irma. Such organizations do not have research and program development costs, which can make an NGO’s overheads look less efficient than they really are.

What You Can Do

After Hurricanes Katrina and Sandy, and the Haitian earthquake, the American Red Cross (ARC) received stinging criticism.

The ARC was raking in millions. But it was not always spending that money effectively, or even for the purposes for which it was given. It had a worrying tendency to prioritize publicity over relief efforts, since it helped to generate more donations.

Worst of all — for me anyway — the ARC raised over $450 million for Haiti but built very few houses for earthquake victims.

The ARC is in better shape now — partly thanks to the advent of research tools for charitable givers, and, for once, the Internal Revenue Service (IRS).

Like publicly traded companies, which must file documentation with the Securities and Exchange Commission annually, all U.S. 501(c)3 nonprofits must file a Form 990 with the IRS.

This publicly available information allows you to discover an organization’s charitable commitment and fundraising efficiency ratios, along with other financial information such as executive salaries.

Several organizations use Form 990 information and other input to rank nonprofits and provide more detail on their activities so you can make more informed charitable giving decisions. They include:

These sites are good places to start. But just as you would do when considering investing in a company, you need to do more. Google the charity with the word “+criticism” next to it — for example, “’American Red Cross’ +criticism.”

What you find may surprise you … but that’s better than wasting your hard-earned money.

Kind regards,

Ted Bauman
Editor, The Bauman Letter

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