1. WHAT IS A SIMPLE DEFINITION OF WHAT AN ENDOWMENT FUND IS?
An endowment is a fund which is kept in perpetuity (forever ). This means the dollars donated to the fund are not ever directly spent by the nonprofit. Instead, the funds donated to the endowment provide money that is used for the benefit of the charitable cause through interest earned, dividend earnings and appreciation.
No. An example of an organization that may not need an endowment is an organization that is formed in support of a short-term cause or particular event, such as an organization formed to support a community after a natural disaster. However, even for short-term causes, an endowment can still help if there is enough time to allow interest, dividends, and appreciation to occur. So, the definition of what is a “short-term” cause is subjective.
3. WHAT IS THE DIFFERENCE BETWEEN AN ENDOWMENT AND AN OPERATING RESERVE?
An operating reserve is a board designated fund that may act like an endowment. This is because an organization chooses not to touch the principal (the money). The principal may be used should the board decide the funds are needed—sort of like the cash you put aside in your savings account. Operating reserves are usually internally managed and invested by the organization's staff and board.
On the other hand, an endowment is a fund where the principal is “protected” meaning the organization is not able to spend it. That is why it is called a “forever” fund. The principal cannot be touched by the nonprofit. Most often then, an outside party, like an investment professional is responsible for managing the fund.
4. WHAT IS THE DIFFERENCE BETWEEN AN ENDOWMENT FUND AND FUNDRAISING?An endowment is a fund which continues to grow in perpetuity (forever) and the principal (the original gift) is not spent. Therefore, the gift may continue to grow and provide your organization with funds forever.
In contrast, fundraising is an act of collecting donations. The collected funds are used to support your charitable cause, and are also used for daily operations. Endowment planning and fundraising do not conflict, but rather show donors that your organization offers many ways to give. Because donations through traditional fundraising are spent as needed, fundraising is a constant effort that requires annual appeals and effort. Money raised through standard fundraising may be spent as the organization sees fit.
Endowments require an initial effort, though once the contribution is achieved, the amount continues to provide the organization with funds forever. In addition, often times, with an endowment, the donor can specify what the resultant earnings may be used for.
5. WILL HAVING AN ENDOWMENT CONFLICT WITH CURRENT DONORS GIVING?Absolutely not! In fact, the opposite is true. And further, nothing prevents a current donor from giving in both ways. Here are some reasons why having an endowment actually makes your nonprofit look better:
- Presenting an endowment fund to your current donors will show them that your organization has the foresight to stabilize its financial future.
- Secondly, experience demonstrates that dedicated donors do not choose among ways to support their favorite charities, but frequently participate at various levels.
- And lastly, endowment gifts generally come from an individual’s assets, while fundraising generally comes from an individual’s income---meaning endowments are usually made from a different source other than a donor’s ordinary yearly income.
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