Charitable Donations: Making Sure Your Money Goes Where You Want It

If you have parents – and I'm hoping that you, like me, are lucky enough to still have them around – then you've likely been faced with the following question each year on their birthdays, anniversary, or other gift-giving holidays:

“What do you get for the person who has everything?”

I know this has always been an issue for my parents, who (1) have never hesitated to buy what they want, when they want it, with their own money, and (2) usually tell me “Oh, don't spend your money! I know you're saving up for ______” whenever I ask them what they'd like to see under the Christmas tree.

So years ago, I decided to take their advice and stop wasting my money on presents they truly didn't want. Instead, I started making charitable donations in their name to a variety of non-profit organizations. But even that generated debate, once my financially-minded father got involved.

Selecting Charities

The first year I gave my parents certificates for charitable donations made in their name, I did my best to find organizations that they connected to. I decided to donate $25 – or three chickens – to Heifer International, a program that strives to end hunger in developing nations by supplying its residents with food sources (remember those chickens?) and skills to create sustainable resources. Choosing this charity for my mom was easy, after I spotted a Heifer catalog sitting on her kitchen table when I was home for Thanksgiving break.

Finding a charity for my dad was more difficult. Then I remembered that his father – my grandfather – had died of a heart attack, and decided a gift to the American Heart Association in both their names would be a good idea.

I was wrong.

Evaluating Charities

My dad has never been able to accept a gift at face value, so he decided to do a little digging on the AHA. Turns out, the charity isn't always efficient with its donations. According to the website Charity Navigator, the AHA currently ranks as the top charity with a highly-paid CEO and a low-rated organization.

Here's what that means:

  • Charity Navigator, and other sites like it, compare a charity's overall contributions against its fundraising and administrative costs – things like CEO pay
  • The goal is to see a charity whose direct-to-program contributions are 75 percent or higher; anything lower than that suggests inefficiency
  • They also look at other factors, including transparency of the organization

The AHA scored poorly on both fronts. According to Charity Navigator, in 2011, just 53.3 percent of the AHA's contributions went toward programs that include awareness, support, and research functions – that's far below the site's 75 percent benchmark.

By comparison, the charity I'd selected for my mother – Heifer – was doing pretty well. 73.2 percent of its contributions went directly to those in need, meaning that of my $25 donation, $18.30 are going to help people, not pay for administrative costs or support fundraising efforts. But that's not the only factor to consider when evaluating which charities will get your cash. Charity Navigator also looks at accounting and transparency metrics – things like whether the charity has a conflict of interest policy or easily accessible financial and tax documents. While Heifer got a financial rating of 50 out of 70, earning it two stars, it had a perfect transparency score, earning it four out of four stars; by comparison, the AHA had a financial rating below 40 and a transparency rating of just 59 (out of 70).

Lessons Going Forward

Since my initial foray into charitable donations as gifts, I've found a lot of winners and losers. I've learned that charities I thought were totally solvent aren't always as strong as they outwardly appear; I've learned that some small charities can be big winners, and some big charities can be losers. But more than anything, I've learned that you've got to shop around with which non-profits get your donation – otherwise, your hard-earned cash will only go to waste.

Reader, which charities get your donations? How did they stack up against Charity Navigator's metrics?

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Yasir Khan

Yasir Khan is a financial writer and SEO marketer. As the founder of WealthKept, he and his team of writers give detailed financial advice to ordinary people every day. Mr. Khan also owns an SEO marketing firm.