3 Things to Do Before Giving to Charity

Americans are known for their charity. According to the Giving USA Foundation, Americans gave close to $300 billion last year, and the Charities Aid Foundation ranks the United States in the top 5 of global givers.

But although we’re a giving nation, we could help even more if we used our heads as much as our hearts. Unfortunately, a lot of charities aren’t what they claim to be – some spend too much on administration and overhead costs instead of fulfilling their stated purpose, while others are outright scams. Avoiding unworthy charities requires giving a little time along with our money.

So the next time you feel charitable, run a check before you write one. It won’t take long, it will make your gift that much more valuable – and you will feel better knowing the money is in good hands.

As mentioned in the video above, here are some ways to check out a charity:

1. Understand the mission statement.

Does your charity have one? If it doesn’t, you should wonder how organized it is: How does it set goals and accomplish them? You can’t judge how well a charity is doing if you don’t know what it (supposedly) does. Here’s the mission statement of Human Rights Watch, for example:

“Human Rights Watch is dedicated to protecting the human rights of people around the world. We stand with victims and activists to prevent discrimination, to uphold political freedom, to protect people from inhumane conduct in wartime, and to bring offenders to justice. We investigate and expose human rights violations and hold abusers accountable. We challenge governments and those who hold power to end abusive practices and respect international human rights law. We enlist the public and the international community to support the cause of human rights for all.”

Be skeptical of any group that isn’t clear about its goals and make sure they align with yours.

2. Look at the numbers.

OK, so they’ve got a goal. But how are they at following through? Make sure your charities produce results. Doing this means either looking at their financial statements yourself, or relying on a watchdog organization that you trust to evaluate things like administrative costs, CEO salaries, and fund-raising expenses.

To see exactly what a charity takes in and pays out, just look at their tax return, called a form 990. Unlike personal or most other income tax returns, most charity returns are public information. Here’s one place you can find them online – non-profits also have to furnish you a copy on request. Among the interesting things you can learn by looking at them is how much the officers of the non-profit get paid – just go to Part VII of the return.

Charity Navigator’s 2010 survey of CEO compensation points out many charities with high CEO salaries. For example, the CEO of the Scripps Research Institute hauls in more than $1 million every year – seven times the average for health groups. They also have a list of charities that pay huge salaries to relatives of CEOs who serve as “treasurers,” “secretaries,” or “directors.”

Another thing to look for is overhead and fund-raising costs, especially relative to the amount spent on program services. A rule of thumb used by the Better Business Bureau is that charities should spend at least two-thirds of their budget on programs. According to Charity Navigator, they should spend more than 75 percent on program services. In other words, if they take in a dollar, at least 75 cents of it should go to their charitable purpose, with no more than 25 cents going for things like salaries, fundraising expenses and administrative costs.

If you don’t have the time or inclination to pore over the financial statements of a charity, there are plenty of organizations that do it for you.

• Charity Navigator
• Better Business Bureau
• Charity Watch
• GuideStar

3. Be careful who you’re handing money to.

Always be wary of solicitations, and never be pressured into donating over the phone or at the door. If the group is legit, it shouldn’t mind waiting for you to do some research before donating.

Example: Stacy once noticed spare change collection boxes on several local merchants’ counters that supposedly benefited the orphans of 9/11. He called the charity and within minutes found out that the charity existed but it didn’t collect money that way. In fact, it wasn’t collecting money in his state at all. The change collection boxes were counterfeit, and they’d been sitting on various counters for months and were being periodically emptied by a thief. Stacy notified the merchants and called the cops.

Moral of the story? Don’t ever hand over money – even pocket change – without verifying who you’re donating to, even if they claim to represent a legitimate charity. If you want to donate, send a check directly to the charity.

Follow these steps and you’ll have a good picture of a charity – why they exist, who they benefit and how they spend their money. Because the last thing you want to do is take your hard-earned money and waste it, especially when there are so many worthy causes that can use the help.