An Economist’s Guide to Year-End Charitable Giving

The end of the year is a giving season for many (I suppose a cynical economist might think tax deductions has something to do with it).  Most of us like to make sure we’re making well-researched and wise decisions when it comes to our money, be it reading the online reviews before a purchase or investing our savings. By contrast, donating to charities can seem like a “black box.”  Many of us our rely on what feels right or seek out an organization in an area we have a personal connection to, but examining some bad habits about charity giving might help make sure our dollars go farther this giving season.

Bad Giving Habit #1: Choosing based on low overhead and fundraising expense ratios

Administrative expenses tell you nothing about if the charity’s work actually does anything, or if it does, how much good it does. The proper question to ask should be “for every $1 I give, how much good is generated?” and not care about how the sausage is made. Different organizations might have different business models, and two organizations might approach the same problem, say clean water in poor villages from two different approaches – perhaps digging new wells versus cleaning existing water sources. Don’t ask who spends less on expenses like copier toner and legal costs, ask which organization will get clean water to the most people with your money. I went into this in more detail in a post a while ago, and when I compared charities’ ranks on a site that rank using overhead ratios, to a site that does thorough research on effectiveness, organizations that were rated as more effective also tended to have slightly higher expense ratios.

The second reason to be wary of administrative expense rankings is that money is movable, and it’s easy to manipulate one’s ranking by shifting budgets around, so the difference between, say a 5% overhead expense organization and a 10% one might just be in accounting. The one exception, where it is useful to consult overhead expenses, is to weed out potential fraud. Organizations with crazy high expenses, say 30 percent or more (see a top 10 list of fraudsters here), should be avoided. These are groups that are so badly run they can’t even massage their numbers enough to get them down. 

Bad Giving Habit #2: Restricting what the organization can do with your money

Some organizations will tempt you to give by letting you earmark your donation to be spent on a particular item – the “give a goat” experience. It feels good to visualize something concrete you gave, but the reality is that the charity probably knows how to spend it best, be it on the goat itself or on identifying the best recipients.  They spend all their time on thinking about the problem, give your money without strings and trust them to spend it well. 

Bad habit #3: Spreading the love, dividing your donations among many charities

Organizations usually have transaction costs for processing each donation, and also spend time and money communicating with their donors – you might have noticed all those mailings piling up this time of year. So giving a large number of small donations is actually less effective than a few larger ones. Plus, if there is one that is doing the most good for the cause you care the most about, then every dollar you give to the one doing the 2nd best work is a dollar not given to the one doing the best work!

Bad Giving Habit #4: Fooling yourself that you give what you think you should be giving

We have the best of intentions for things we mean to get to, quitting smoking, eating better, exercising, but the unfortunate truth is that we often don’t get to those things we told ourselves we would, and that goes for charitable giving as well. A few techniques to help align our actual behavior with our desired behavior: (1) set up a repeating donation you won’t have to think about – perhaps a workplace plan that automatically deducts from your paycheck, or a repeating donation from your credit card, (2) make an agreement with friends to make sure you’re held to your giving intentions (and deciding together where to give can be fun and engaging), (3) if you don’t give as much as you’d like because you are strapped for cash, think about some discretionary item that you’d like to give up, and go to instead.com to help put in place your plan, or (4) if you have the income to give more but don’t give as much as you’d like to because you just never get around to it, think about attaching giving to something fun, so that it can add to the fun (e.g., family member birthdays, or perhaps just something simple, like matching all jewelry expenditures with a charitable donation).

Bad Giving Habit #5: Giving to things that advertise well, rather than to what works

I’ve seen hundreds of charities and aid organizations in my work as a development economist and with my work with the non-profit I founded, Innovations for Poverty Action (IPA). IPA evaluates the effectiveness of poverty interventions around the world, and then works to scale-up the ideas most cost effective. Knowing if an organization is having an impact can be difficult, but there are a couple of shortcuts you can take.

First, check out whether they just post glossy numbers, or are there any academic papers they can cite that document their impact? I realize I’m an academic, so more prone to believe academic work, but the reality is that most academics care more about methods, and methods when it comes to evaluation do matter. At IPA we have championed the use of randomized trials to measure impact, and have found many ideas rise above the riff-raff and work better, and those ideas aren’t always the popular ones. Examine whether they just post “before-after” stories (before, our participants earned $1/day, afterwards they earned $2/day), or whether they compare the changes for their participants to those of a comparison group, so that you know they actually caused the changes to happen. Maybe the economy or rainfall just got better, and everyone in the area went from $1/day to $2/day?

Alternatively, start the other way: find research and news articles on research on what works, and then fund the organizations that put forward the research, or other organizations that do the same thing.

So what’s a good habit? Copying

Here’s a time I wouldn’t mind telling my students to cheat, cheat, cheat. Copy off the smart kid, like Warren Buffet did when he put his money behind the Bill & Melinda Gates Foundation, whom he knew was doing great work. Find an organization that has the right philosophy and copy what they’re doing. At IPA, we didn’t see a good place for people to donate to initiatives which had good evidence behind them, so we created the Proven Impact Fund.

Foundations you might look at include Bill & Melinda Gates, and Hewlett foundations. Givewell.org also does thorough assessments of organizations’ impact and recommends 3 top charities (full disclosure, they use IPA’s research a lot to guide their analysis).

You can also look at organizations which are dedicated to conducting rigorous evaluations of their work and making the results available for others to learn from. Examples of organizations that work internationally and evaluate rigorously a large proportion of their programs include Pratham, Seva Mandir, Living Goods, BRAC, and Freedom from Hunger.

Although it might take a few extra minutes don’t be afraid to open up that black box and take a look at where your money is going – it’s the best way to maximize the good your dollars are doing.

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COMMENTS: 14


  1. frankenduf says:

    #4 reminds me of the Seinfeld bit where George critiques the gift of giving to charity, and of course takes it to the cynical extreme

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  2. James says:

    Just a thought or two on transaction costs. First, it would seem (Freakonomically) reasonable for me to reduce those costs to a minimum, by just leaving selected charities large amounts in my will.

    Second is the annoyance factor. For instance, I used to make regular contributions to a particular environmental organization, which would respond with further begging letters, including “gifts” such as address labels. Not only were these of no use to me (since I do almost all correspondence on-line – this is the 21st century, folks!), they had my name & address wrong so I couldn’t use them even if I had a use for address labels. So this environmental organization is willing to waste fuel & paper, violating its own goals to try to get a bit more money from me.

    I’ve since directed my contributions elsewhere (but they still keep sending me those labels). I wonder just how often similar scenarios are repeated, and well-meaning but misdirected fundraising efforts actually prevent donations that would otherwise be made?

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    • Jason says:

      There is nothing wrong with setting up a bequest to a charity in your will instead of giving now. This assumes that you #1) Inform the charity that they are in the will and the approximate size of the gift, so they can plan ahead; and #2) Sequester the money in an investment account that earns at least enough to keep up with inflation. Otherwise, you are not really doing the same thing as giving now.

      As for annoyances, the fact that some organizations are bad at fundraising is not a reason not to give to any charity. I hate the phone calls from paid fundraisers who presumably take a massive cut. I try to use those as reminders to go online and give to actual charities.

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      • Enter your name... says:

        Well, it depends. People eat every day, not in the long run, so if your issue is hunger, you will do more good by donating 2% of your lifetime goal every year rather than saving it up (while people go hungry) to give it all when you’re dead.

        You could take an intermediate approach of making a major donation every few years (perhaps when the economy is down and therefore other donations are scarce), rather than all of it when you’re dead.

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      • James says:

        “…the fact that some organizations are bad at fundraising is not a reason not to give to any charity.”

        This is true, and I thought I’d made it clear in my post. My point is that PARTICULAR charities which are obnoxiously annoying in their attempts to raise money from me are in fact running up against that old law of unintended consequences. Left to myself, I might have continued to give that group $X every year. Their attempts to increase it to $2X have instead reduced my future contributions to $0. (The $X is of course going to a different group.) So they have wasted their fundraising money.

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    • Enter your name... says:

      We keep about four groups on our list at any point in time (not counting public radio, which we think of as “user fees” rather than “charity”). I’ve had pretty good success with contacting fundraising teams and asking to have mailings suppressed, especially for larger groups. One annual gift goes with a note that I’m donating in the first month of the annual gift campaign so that they will spare me another 11 months of junk mail. This has worked well, with only a single slip-up in about ten years now. Another organization ultimately needed to be told that if they couldn’t figure out how to stop phoning me, then their donation would be going to one of their “competitors”, who had already figured out how to keep our phone number off their list. Most charities want to get this right, so a clear request is usually effective. If you want to stop the mailing labels, then I suggest sending a nice e-mail message to them.

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  3. Howard says:

    I always go to the CharityNavigator website and look at the amount paid as executive compensation. If the person who runs the organization gets paid a lot (however one defines that), go elsewhere.

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    • Adam Casey says:

      “If the person who runs the organization gets paid a lot (however one defines that), go elsewhere.”

      Why? Running a large charity is a very hard and demanding job, just like running a big company. If you dont pay your top execs then the charity will be run part time by people who aren’t in high demand anywhere else.

      The question should be: If the charity cut the salaries and put that money into front-line activities what would the effect be? Would the gain from this extra money be more than the cost of having to hire a worse executive?

      I understand the feeling that it’s unfair for a charity to pay a lot to their execs, but you’re not donating to charity make you feel better, you’re donating to do some good.

      Well-loved. Like or Dislike: Thumb up 13 Thumb down 1
  4. Alan T says:

    Thanks to your informative post, I found out that the charity to which I recently “gave a goat” is not one of the top-rated charities at Givewell.org. I will use the sites you mentioned when I make future donation decisions.

    Thank you and Happy New Year!

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  5. Gillian says:

    Oooh … I have to see how I do on your recommendations.

    1. Low overheads and fundraising. Most of our money goes to The School of St Jude, in Tanzania. The founder lives onsite and watches expenses like a hawk. We’re comfortable that the maximum goes on running the school.

    2. Restricting what they can do. We give an annual lump sum. We figure they know what they need better than we do. And that is ever clearer as they continue to grow and take on new challenges.

    3. Dividing your donations. Nope – we decided early in the piece to focus on one main project. We like that we have gotten to know it well. We feel comfortable saying to others that we already give to a school in Africa. Smiles all round.

    4. Fooling yourself. It’s not easy to fool yourself when you know that you plan to give $x to the School of St Jude. You know whether or not you’ve done it. We do it via an annual payment, so it is quite obvious.

    5. Giving to what works. We decided on an education project in Africa as one that would make a real difference. The School of St Jude educates bright children from the poorest homes. They take only one child from each family. They are educating future professionals in a poor country that has a stable government. The school has grown from 3 students in 2002 to 1650 in 2013. They rank top in national exams among 300 schools in NW Tanzania. It’s working.

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  6. Kevin says:

    Just wanted to quibble on a couple points in an otherwise excellent piece — it’s dangerous to focus on the “best” work, since so many entirely deserving human services charities tend to work in the margins to provide services that are difficult to quantify. At Resources for Human Development, a national nonprofit where I work, we turn vocational day programs for people with intellectual disabilities into full-on art studios where clients are engaged and thriving, creating artwork, music, sculptures, etc. They sell their work in the community, become empowered as artists, their quality of life increases exponentially … they’re awesome. But — “quality of life” is a largely unquantifiable and intangible piece. We lack the kind of outcomes people enjoy (similar to the “give a goat” habit, like the test scores in Gillian’s school in Tanzania). It’s not like people with intellectual disabilities are going to be “cured” (for lack of a better way to put it) and go become economists or lawyers or something; many of our folks are going to be in our day programs for the rest of their lives. But their lives are far, far better for having been in an RHD program, and that has value, too.

    For example, here in Philadelphia, if your issue is homelessness, you likely have a number of organizations to choose from that do almost equally terrific work. RHD publishes One Step Away, Philadelphia’s street newspaper that works as a supported employment program for people experiencing homelessness. It’s fantastic; people working with us earn enough money to get out of the shelters and pay their own rent, providing for themselves instead of relying on taxpayer-funded services in city shelters. We don’t provide housing; we provide the dignity of meaningful work. We’re a little unconventional in that approach to homelessness. So: Does that mean our organization is doing the “best” work? Or perhaps just really good work that also has value and deserves support? I’d make the point that bad habit #3 is actually OK, as Norm Geras suggests here:
    http://normblog.typepad.com/normblog/2012/12/is-there-a-best-way-of-charitable-giving.html

    Giving money to a housing-based organization and also to One Step Away is perfectly acceptable (in fact, you should do that. Right now. Do it.). Making a choice between the two based on your perception of the “best” work doesn’t just make sure every dollar goes to your first choice, it also takes dollars from your second choice – even if they do really good work, too … it’s OK, sometimes, if you want to give a goat, you know?

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  7. Ariana says:

    A comment on #3, touched upon on #4:

    This does not mean, necessarily, that you should donate a single lump sum once in your life and be done with it. Another option (which may work better for some NPOs than others) is to set up a reoccurring monthly or annual donation. While this may still incur the transaction/deposit fee more often, it also allows the organization to budget more effectively – rather than wild and semi-random swings in the amounts of working capital they may have at any given time, a reoccurring donation lets the NPO know exactly how much and when your donation comes in, and in this reduce the amount of time they spend on processing and managing your donation as well as facilitate the planning of how to use it more effectively. This surety can possibly do more good for the organization than the additional cost of transaction/deposit fees.

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  8. Todd J. Sukol says:

    This is so well said. I work with some extraordinary people at family foundations from whom I’m learning how important it is to blend our heads and hearts. The idea of rating systems is great, but as a practical matter they are useful (at best) only as ONE of many criteria upon which decisions should be made. Do More Mission does a lot of work with what we call “intent codes,” where givers delve into their own values and desires as much as they evaluate organization. See related blogs, articles, etc. at http://www.domoremission.com. I’ll pass on the “5 bad habits” – good stuff. Thank you. Todd

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  9. Andreas Moser says:

    The worst thing in 2012 were the people who were giving money to victims of Hurricane Sandy: http://andreasmoser.wordpress.com/2012/11/04/no-donations-for-sandy/ , especially when the money came from poorer countries than the US.

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