Giving some of your money away to worthy causes can enrich your life in many ways. It gives you a greater sense of purpose, helps build up communities, and kicks off a positive ripple effect in the universe.
But, not all charities are created equal. Behind the scenes of each charity there can be a lot of overhead, inefficiency, and sometimes *my heart drops just typing this* corporate greed. Sometimes when you make a donation, only a fraction of that money goes directly to supporting the organization’s purported cause. The rest is spent elsewhere – fundraising efforts, salaries, transactions costs, mismanagement, etc.
Each and every dollar you donate has the potential to make the world a better place. That’s why it’s so important to vet a charity *before* you make donations. This will make sure your money is being used in the most effective way possible.
Why Vetting Charities is Important
Just like any other organization, some charities are going to be better run than others. Very efficient charities can stretch their donations a lot further. Versus poorly run (or corrupt) charities, which might mismanage the funds they receive. The good news is, we’re going to help you easily sniff out the good places vs. the bad.
Here are just a few reasons why it’s so important to take vetting charities seriously:
It Keeps Your Money Safe From Scammers
As terrible as it sounds, there are people in the world who take advantage of humanitarian crises to steal your money. There are also some scammy charities who make their money by impersonating reputable ones to line the pockets of executives.
Sometimes, unethical charities will use a name that’s just slightly different from the name of a major well known charity. Their hope is that generous people will get the names confused and blindly give donations. For example, an organization once called the Cancer Society of America posed as the well known and reputable American Cancer Society. They cashed over 150 checks made out that really weren’t meant for them. When you fully vet a charity it prevents you from donating to shady organizations like this!
Makes Sure Their Mission Aligns With Your Values
While on the surface it may seem like a particular organization is supporting a cause that’s near and dear to your heart, when you dig deeper, you may not agree with their methods. Or you might notice huge inefficiencies in the ways they are trying to accomplish their goals.
It’s important to read past the tagline of “ending poverty” or “strengthening education” to fully comprehend the work that an organization actually does. Fully vetting charities will help ensure that you’re not just giving and hoping. But that your money is directly aiding a mission that aligns with your values.
Make sure your money is actually going to the cause
Administrative costs are unavoidable within nonprofits to a certain degree. Those organizations need staff and those folks need to get paid! However, the best charities will work to put as much of your donation as possible towards their charitable efforts.
Charity Watch, a popular charity rating website, considers an organization to be “highly efficient” if it spends 75% or more of its funds on their programs, and maintains overhead of less than 25%. This means that for each dollar you donate, 75 cents or more is going directly to the cause you donated to. While not a hard and fast rule, this can be a good frame of reference when you vet a charity. It helps in deciding if your prospective charity has a low enough overhead to warrant receiving your donation.
A great example of an organization that failed to do a good job at keeping costs low is NFL Quarterback Rusell Wilson’s “Why Not You” charity. They received some bad press earlier this year for having way too much overhead. Less than 25% of donations were spent on charitable endeavors. OOF!
Here’s another sad list of America’s worst charities. Many of these gave direct cash aid of less than 4% (yes, you read that right) to causes. Makes me sick thinking of all the people that wrote checks thinking all their donations were helping others. But in reality only $4 out of every $100 actually helped 🤮
All in all, It’s super important to pay attention to how much of your donation is spent on other costs. Opting to donate to organizations with lower overhead ensures that your money is working it’s hardest. Your donations are making the world a better place and not just lining the pockets of the people who run the organization.
How to Vet a Charity
Now that you understand why it’s so important to spend more time vetting charitable organizations, here is a step by step guide on how to do it yourself. In most cases, you can research and vet a charity with just a few hours and an internet connection!
1. Check the Charity’s Registration and Tax Status
All charities should be properly registered with government agencies in order to receive your donations.
A great way to make sure that a charity is not a scam is by checking the registration and tax status of your organization. You can do this by using the Tax Exempt Organization Search Tool on the IRS website. Just type in your charity name and make sure it pops up!
Needless to say, if the people you are about to give money to aren’t complying with IRS rules, they are probably untrustworthy! But if you see them registered with proper documentation, that’s a good first green light!
2. Research the Charity’s Mission and Impact
Beyond just reading the headline statements, take an hour or so to do a deep dive on your prospective charity’s mission and impact. Many nonprofits publish an annual report which covers the work they’ve done with their funds over the previous year, and what they plan to do in the coming year. These are typically distributed to donors but will likely also be available on a charity’s website.
Here’s a great example from the American Red Cross Website. You’ll notice almost 20+ years worth of reports and detailed accounts of where money is spent.
Now, not all charities have the time and resources to publish extensive reports like this. However, if you’re unable to find details online, feel free to reach out directly to the organization and ask for a copy.
You can also further research a charity’s impact by reading news articles or checking out media coverage of their work online. Simply search the charity name on your favorite search engine, and filter it by news articles.
3. Evaluate the Charity’s Financial Transparency
When vetting a charity, there are financial documents you can look for to ensure the organization is transparent about their finances. Charities are required to make certain tax forms, like 990s, publicly available online.
Finding these documents can be a little trickier, but you should be able to locate them through a number of databases, like Candid. Once you find an organization’s 990, you’ll also be able to see the salaries for officers, directors, trustees and managers.
4. Look for Ratings and Reviews
Vetting charities can be a little time consuming. Luckily, some trustworthy organizations have done some of the hard work for you. You can look on charity rating websites, like Give.org, Charity Navigator, CharityWatch, and GreatNonProfits.
These websites typically assign a score or rating to different charities based on their finances and transparency, leadership, culture and impact. By reading up on prospective charities on one of these websites, you can ensure that your dollars are going towards organizations that reflect the best practices for nonprofit organizations. Give.org even has a page where you can inquire about a charity even if they haven’t evaluated it yet!
Givewell is another awesome non-profit that we love. They make recommendations of other non-profits based on extensive research, so donors don’t have to. We actually interviewed one of the founders, Elie Hassenfeld recently and it’s well worth a listen!!
5. Contact the Charity Directly
Sometimes the best place to find out information about a charity is by contacting it directly.
Volunteers or staff at any legitimate charity will be more than happy to answer any questions you may have. If they don’t have much time, they can direct you to resources where you can learn more about the work they do.
One of our personal finance friends, Joshua Becker, founded a charity called The Hope Effect. He’s one of the busiest people we know, but he’ll drop anything to answer questions about the work his charity does. Founders are extremely passionate about their giving so never be shy in reaching out to ask questions!
6. Talk to other Donors and Volunteers
One of the best things about being generous is that it brings people together. If you’re looking for the best charities to donate to, reach out to other donors or volunteers in your community to learn more about their experiences.
By talking to real people who have actually dealt with a specific charity, you’ll be able to tell immediately if their way of doing business aligns with your values. Donors are all in the same boat – wanting their dollars to stretch as far as possible in order to help a cause they care deeply about. You’ll likely find rubbing shoulders with other generous people will make you feel even better about giving.
7. Watch out for these Red Flags
Now that you understand the steps you can take to make sure your money is going to a responsible organization, be sure to watch out for these red flags as you make your donation.
High Pressure Tactics
If that call with a fundraiser is starting to feel more like that timeshare presentation you attended in exchange for a free breakfast, it’s not a good sign. Usually, when people are trying to get you to make a quick decision, it’s because they don’t want you to notice that they’re being sketchy. Steer clear of these organizations to make sure you don’t end up getting scammed. Never be afraid to tell them that you will not be making a decision today.
Exaggerated Claims
If it sounds too good to be true, it probably is. Of course charities will highlight their accomplishments over the years. But the best ones usually have a good idea of what their shortcomings are, and how they plan to tackle them should they receive additional funding. Watch out for wild or sweeping claims when deciding where to send your hard earned cash.
No Clear Mission
It’s a good idea to avoid donating to obscure charities without any real or clear mission and impact statement. Again, any charity worthy of your time and money will have excellent volunteers and employees . They should be able to tell you exactly what they plan to do with donations.
Weird Donation Methods
Watch out for any organization that asks you to donate money to them via a wire transfer or a gift card. These are likely scams, and they could end up taking more than just your donation if you aren’t careful!
Instead, use your credit card to donate to charities through secure checkout portals. Credit cards come with additional fraud protection as opposed to debit cards. However, never give an organization your credit card number or personal information until you are 100% sure it is legitimate.
You can also give via a Donor Advised Fund for greater anonymity if that’s important to you. Daffy is an HTM favorite. They’re a top-notch DAF that’s well worth looking into!
The Bottom Line:
We believe that everyone should be generous – whether they donate time, money, or simply just help out their family and friends when they can. However, you don’t want to trust the wrong place with your hard earned donation money and see it squandered.
Before making donations to new charities, take some time to research exactly how your money is going to be used. This will ensure your donation and giving efforts have the greatest impact.
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