5 Questions to Ask Before Donating to a Charity

How do you know if the charity is real or a scam? And even if it is legit, how you know it's making the best use of your donations? CatLane/Getty Images

With the holidays approaching, expect a barrage of mail, phone calls and Facebook posts soliciting donations to charities. 'Tis the season of giving and we all want to be generous, but it can be hard to see past the heartstring-tugging marketing campaigns — who doesn't want to save baby polar bears and feed hungry kids? — and decide which charities will do the most good with your money.

We talked to experts in charity evaluation to help us answer five of the most important questions when choosing a charity. As an overall tip, they agreed that the smartest way to donate is to be proactive. Don't wait for charities to solicit you, because you're liable to make a donation decision based solely on emotional appeal. Instead, do your homework and find charities that not only mean something to you personally but have a proven track record of success. Here are five questions to help guide your charity decisions.

1. How Do I Know if a Charity Is Actually Effective?

As satisfying as it feels to donate money, the whole point of charitable giving is to contribute to organizations that are making real positive change, whether it's finding innovative new cures for cancer or protecting the rainforests. But judging a charity's true impact, especially when the charity is combating a deeply entrenched problem like poverty or homelessness, isn't always easy to do.

"Effectiveness is really tough to get at," says Daniel Borochoff, president and founder of Charity Watch, an independent organization dedicated to investigating, analyzing and rating U.S. charities. "What I encourage people to do is look for specific accomplishments in relation to spending. For example, 'We're spending this much money and we're able to feed this many people.'"

You should be able to easily find that type of information on a charity's website or in the "outcomes" section of its annual report. If an organization doesn't publish an annual report or can't back up its claims of making a difference with actual statistics, that's not a good sign.

If efficacy is your top priority, consider giving to one of the Top Charities chosen by the research team at GiveWell, a nonprofit organization that handpicks a small group of fully vetted international charities. Only nine charities currently make the cut, and each of them was selected based on four criteria: they must be evidence-based, cost-effective, transparent and underfunded.

All of GiveWell's top charities focus on global health and global poverty alleviation, because that's where inexpensive, targeted interventions can make the biggest difference, says Isabel Arjmand, a research analyst at GiveWell. For example, it doesn't cost much to make and distribute insecticide-treated nets, but they've proven to be highly effective for stopping the deadly spread of malaria. Same with inexpensive vitamin A drops that can effectively prevent blindness and malnutrition in children.

Arjmand says that the GiveWell team, composed of Ph.Ds in economics and public policy, builds complex cost models that take into account dozens of different inputs. They put in thousands of hours investigating each charity and even make site visits to see the work in action. Last year, Arjmand and some GiveWell colleagues spent two weeks in Guinea in East Africa meeting with a team from Helen Keller International, which distributes vitamin A drops. It's that level of research that makes GiveWell a smart destination for maximizing the impact of your donation.

2. How Much Should I Focus on a Charity's Administrative Costs and Salaries?

This is a good question, because charity rating sites like Charity Watch and Charity Navigator prominently list the percentage of a charity's budget that's allocated to running the organization's programs and how much is spent on what's commonly referred to as "overhead," or the cost of doing business. For charities, overhead typically includes administrative expenses like salaries for the management team and cost of fundraising.

But how much weight should prospective donors give to those figures? Is a program necessarily inefficient or wasteful if it allocates 25 percent of its budget for non-programmatic expenses, or if its top executive makes upwards of half a million dollars?

Borochoff says that a minimum of 60 percent of a charity's budget should be spent on direct program services, and that highly efficient charities spend closer to 75 percent on programming expenses. But even those figures can be deceiving.

He points out that some charities will claim that all of the money they spend on telemarketing and mass mailing is actually part of their "public education" program, not their fundraising efforts. Others will creatively use large in-kind donations to fudge their balance sheet and make it seem like they're earning more and therefore spending a smaller percentage on administrative costs.

Arjmand also worries that people are too quick to dismiss administrative costs as unnecessary even though it's critically important for charities to hire well-qualified staff.

"Running on a shoestring administrative budget might not be the best way to make your program impactful," Arjmand says.

Bottom line, a single metric like the ratio of programming costs to overhead is useful, but it's not going to tell you the full story. You're better off letting rating organizations like Charity Watch and GiveWell do the heavy lifting when it comes to investigating the complicated accounting and spending practices of these charities.

3. Is It Better to Give Small Donations to Several Charities or a Big Donation to One?

If money were no object, we'd all give generously to a dozen worthy charities every year. But since most of us have to cap our charitable giving, is it better to spread the love around and give small amounts to many different charities or concentrate our support on one worthy cause?

For Borochoff at Charity Watch, it's not only a matter of money, but time. "Don't feel obligated to give to lots of different groups," he says. "You should never give to more groups than you have the time or willingness to scrutinize."

There's no problem with making smaller donations to a half-dozen organizations, but take the time to do your homework for each of them, he says. Use charity evaluation websites to make sure the organization is kosher and visit each charity's website to learn more about outcomes and impact. If that's too much work, stick with the organizations you already know and trust.

Arjmand at GiveWell offers a different take. If you want your money to make the biggest impact over the long term, try to look at donations from the charity's perspective. She says that the most important thing you can do to support an organization's ongoing mission is to give a recurring donation of approximately the same amount every year.

"It's really helpful for charities to be able to plan ahead," says Arjmand.

This is particularly important for young organizations without a lot of assets saved up. Knowing that they can expect X amount in donations for the coming year allows charities to budget for essential programs.

Both Charity Watch and GiveWell make a point of steering donors toward organizations without deep reserves of cash. Charity Watch includes a list of "high asset" organizations that are doing just fine without your money. For instance, a popular charity like Research to Prevent Blindness, for example, has enough assets on hand (a cool $278 million) to run its programs for the next 16 years without a single additional donation. All nine Top Charities picked by GiveWell are classified as "underfunded."

4. How Wary Should I Be of Charity Scams and Frauds?

Over the summer, Federal Trade Commission investigators announced more than 100 actions against dozens of fraudulent charities, most of them falsely claiming to serve U.S. military veterans and their families, but really lining the pockets of charity executives with tens of millions of ill-gotten dollars.

While fake charities are a real problem, Daniel Borochoff is more concerned about legitimate charities that happen to be "woefully inefficient and wasteful."

Without charity evaluation sites like Charity Watch, it would be very hard for the average person to tell the difference between two equally worthy-sounding organizations like the Breast Cancer Research Foundation and the Breast Cancer Research and Support Foundation. Charity Watch digs through financial filings and IRS audit information to figure out exactly how much of every dollar is actually spent on charitable programs and how much is spent on administrative and fundraising costs.

In this case, the Breast Cancer Research Foundation gets an A+ rating because 90 percent of its budget goes to supporting breast cancer research and the group only spends $7 for every $100 it raises. The Breast Cancer Research and Support Foundation (BCRSF), on the other hand, earns an F from Charity Watch because a dismal eight percent of its budget is spent on actual programming and it spends $87 for every $100 it collects in donations.

"They're both legal, 501(c)(3)-status charities with the IRS and the F-rated organization is still operating within the bounds of the law," says Borochoff. "But you can't assume that just because they're registered or have IRS status that they're an effective and efficient charity."

5. Is It Always Better to Give Locally?

"A lot of people say, 'I only give locally,' and they feel superior about that," says Borochoff. "The truth is that a lot of excellent national organizations have local chapters, like the United Way."

Instead of exclusively giving to local organizations, Borochoff suggests finding a cause that you believe in and approaching it from a few different angles. Let's say you're passionate about protecting the environment. You can give to or volunteer with a local organization that plants trees in urban spaces. But you might also give to a national organization that lobbies Congress for tougher environmental regulations, or an international organization that trains farmers in developing countries in sustainable agricultural methods.

Charity Watch features 36 different categories of charities organized by cause, so it's easy to find a new organization or two to get behind.

Arjmand of GiveWell recommends being open-minded about the causes you're willing to support regardless of whether those causes are local, national or global in scope. You can focus on local issues, but consider that the greatest needs might be far from your community.

When GiveWell began, it considered all charitable organizations for its top spots, including many fighting poverty and hunger in the U.S. But over time, it realized that even the poorest Americans were far better off than millions living in extreme poverty in Africa, Bangladesh and elsewhere. So GiveWell decided to restrict its top charities to organizations working abroad. You, too, might want to focus where your dollar does the most good.

"In general, the more open-minded you are and the broader you set your scope, the more impactful the giving opportunity you're likely to identify," says Arjmand.

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