'Tis the season of giving: of gifts, of parties and of donations to charities. Some 40 percent of all individual charitable donations are made in December.
For many charities -- such as Teach for America, which received 80.5 percent of all individual donations for 2012 in December, and Save the Children, which raked in 68.6 percent of donations in that same month -- end-of-year fundraising is the difference between a successful year and financial hard times.
The American charitable sector is the largest in the world, with Americans contributing more than $300 billion per year in money plus $260 billion in volunteer time. With 1.1 million charities to choose from, it's not easy to decide where all that money should go. Yet all the data show that American donors are just not interested in putting in much time or effort into making those decisions.
In 2010 Hope Consulting, a San Francisco-based consultancy, undertook one of the most comprehensive surveys ever of donor habits. It found that two-thirds of all donors report doing no research at all on their charitable contributions each year, and just 5 percent do two or more hours of research. On average, Americans spend about four times as long to research television purchases (four hours) and eight times as long researching computer purchases (eight hours) than they do with more expensive investments in charities (one hour). Indeed, some of the latest research suggests that Americans may subconsciously avoid finding out the facts in fear of undermining the "warm glow" they get from giving.
Instead of doing research, Americans give out of habit: Almost 80 percent of all gifts are labeled as "100 percent loyal," meaning most people give to the same familiar brands year after year. Donations flow to alma maters, or to a friend's charity, or to the charity that is easiest to give to through work. That's a big reason why the list of America's largest charities has remained remarkably inert over the last 40 years -- because they're rewarded for familiarity rather than any measure of effectiveness or innovation. Compare that with the for-profit sector. Over the same time period, the likes of American Can, Bethlehem Steel and LTV have been replaced by the Apples and Microsofts of the world, reflecting the dynamism of our private economy.
The fact that you're reading this piece indicates that you don't fall into that two-thirds of no-research donors. And of course, it's easy to criticize the giving habits of American donors but much harder to provide specific, constructive advice -- that's why most holiday-giving advice columns are so toothless and generic. We're hoping that this one proves to be more useful.
Rule No. 1
Go for a high-impact donation. This might sound like it's from the "No Kidding" Academy of Donor Advice. But in fact only a small subset of donors -- representing 16 percent of all donors and 12 percent of all donations -- define themselves as "high impact," supporting the charities that create the most social good. The rest fall into categories such as "Repayers," who give to their alma maters, "Personal Ties," for people who give to their friends' organizations, or "Casual Givers," who give to well-known nonprofits through payroll deductions or who buy a table at a charity event. All these reasons for giving are completely unrelated to rewarding the most effective charities. Until you think and act like a high-impact donors, you'll get less than what you pay for.
Rule No. 2:
Don't get obsessed with efficiency. The most pervasive -- and most destructive -- myth around giving is that "efficiency" is the best measurement of charities, and that overhead spending should be kept to an absolute minimum. Yet there's no established correlation between efficiency and effectiveness; many of the investments that are disparaged as overhead -- such as research and evaluation, training, technology, and planning -- can be critically important to building great organizations. The fixation with overhead has conditioned charities to underinvest in organizational growth and to shortchange themselves on research and monitoring. Organizations such as Charity Navigator and the Wise Giving Alliance have traditionally evaluated charities on administrative spending formulas, but earlier this year, they issued a statement with GuideStar that condemned the use of overhead formulas to measure performance.
Rule No. 3
Remember that you're on your own. There are more than 150,000 people in the U.S. who work in the mutual fund industry with the sole purpose of helping people make sensible investment decisions. Conversely, there are fewer than 100 people whose job is to provide the public with information on making effective donations. It's worth checking out the handful of organizations like Give Well that do in-depth analysis of charities. Unfortunately, Give Well reports on only a tiny segment of the charitable world, so donors need to do their own legwork. The website of a best-in-class charity like Youth Villages provides an entire section on results, with a clear statement of organizational goals, multiyear studies of programmatic effectiveness, and independent, third-party evaluations of key projects. Few organizations can muster research as comprehensive as Youth Villages, but you should reasonably expect a worthy charity to at least model itself after the Youth Villages of the world. Want a few more options? You could look into the Nurse-Family Partnership, GiveDirectly, VillageReach or the KIPP schools.
Rule No. 4
Consider who needs your help. Because of all our old, hard-to-break habits in how we give, we badly underweight support for those in need. Less than 12 percent of charitable donations end up with human service organizations, which provide housing, food and nutrition programs, youth development, disaster relief and other services. The other 88 percent is donated to churches, alma maters, civic organizations and the like. You don't have to be critical of the motivations and values of the 88-percenters to think that our charitable giving as a nation has diverged from the core charitable purpose. This is the time of year that people rebalance their investment portfolios. It can also be the time of year to rebalance your charitable portfolio.
Rule No. 5
Give When You Are Ready. Federal tax incentives have relatively modest impact on overall giving, but they certainly do affect the timing of giving: Twenty-two percent of all annual online giving now occurs on Dec. 30 and 31. But when you're trying to support the most effective charities, rushing to get in a last-minute donation is not a recipe for success. We don't have to debate the details of the tax code to know that timing a deduction for 2013 instead of 2014 will not be a material financial event for most donors. Instead, take your time and get your giving right.
If donors did a little more to make sure their billions flowed to the most extraordinary charities -- and there are many of them out there -- we could have a charitable system that even I might not be cynical about.