The Christmas season is all about giving back to others in response to the blessings you’ve received throughout the year. At Money Crashers, we believe that the purpose for accumulating wealth is to become financially independent, leave a legacy for your family, and give back to others. I encourage all of you to give abundantly this season, because giving is one of the most fun and rewarding acititivies you will do in your lifetime.
Unfortunately, there are charities out there that say they are charities, but don’t do a great jobs at using the money donated to them. Here are some tips I got from Kiplinger’s Magazine to help you check out a charity before you give money to it.
- Look at Spending Priorities. Make sure that the charity is efficient. How much of their money is going to the actual charity that they boast? What does their yearly budget look like? You can visit Charity Navigator, which rates the financial health of over 5,300 charity organizations.
- Evaluate Accountability. Make sure the charity has a clearly defined mission and strong organization structure to get things done. Many small non-profits go through years without any significant impact in their community or area of charity.
- Beware of Red Ink. Charities must file a 990 form with the IRS, and if you can’t find it on their website, ask for a copy. They are required to disclose it to potential donors. If that form shows that they have negative assets, then don’t give to that charity. You don’t want that money going toward paying off debts.
- Gauge the Cushion. What you are looking for here is if the charity has an emergency fund. Much like we preach on individuals carrying 3 to 6 months of an emergency fund after they get out of debt, companies should have the same thing. It is expressed as their working capital ratio.
- Review the Charity’s Annual Report. In their annual report, the words are a little misleading. If the auditor puts “unqualified”, then they have signed off on the charity’s finances without reservation. If the auditor writes “qualified”, then he or she believes that the charity will have a hard time surviving for another year, possibly because of the loss of a major donor or a gradual decline in contributions.
The bottom line is to do your homework before you hand over your hard-earned money to a charity this year. Giving is encouraged, but be responsible with it. Just like you would never give a homeless person money to buy alcohol or drugs, you never want to donate to a non-profit company that mishandles their donations.