What is an Endowment Fund?

Endowment funds are incredible assets for any and every nonprofit organization. In this article I will be discussing what an endowment fund is and what benefits there are to having an endowment fund.

What is an Endowment fund?

An endowment fund is an investment fund set aside for a nonprofit organization as a savings account. The principle amount of the fund is never to be touched, while a percent of the interest earned each year (typically 5%) is used as part of the annual budget or other expenses.

What are the benefits of having an Endowment fund?

As I mentioned above, an endowment fund is an incredible investment for nonprofit organizations. Why? Because you can depend on the interest each year. That is money you can depend on without fundraising, grant writing, donors, etc. As long as the organization strictly only uses the interest each year, you will always have money you know will be there next year.

Consider this example.

Say we  have a nonprofit organization with quite a bit of overhead. Perhaps a main portion of their activities is advertising the harmful impact of drugs around the country. Let’s say they spend $75,000 on advertising and $800,000 on salaries and benefits each year. Then lets say that this organization had an endowment fund with $12,000,000 in it. That endowment fund typically has a rate of return around 8% and the nonprofit organization has decided to use 6% of the return in their annual budget. $12,000,000 X .06 = $720,000. That means that the organization has $720,000 each year (and that number will increase every year since they are adding 2% of the interest to the principle each year as well!!!) that the organization can count on in their annual budget.

Let’s think about some of the implications this might have…

First of all, as we discussed, this is money that this organization doesn’t have to fundraise each year.

Also, because of this chunk of money, the organization can now tell their donors that a larger percentage of each donation will go directly to the programs (rather than the overhead because the endowment covers such a large part of the overhead costs incurred each year). Donors like to see that their contribution is going almost completely to the programs!

Furthermore, since your organization doesn’t need to fundraise this money each year, you will probably have more time for the programs in your organization.

Finally, once you have an endowment fund, what should you spend the money on? The interest of the endowment fund will typically be added into your annual budget each year and as I talked about in the example earlier, I think one of the best ways to allot the money is by spending it on the overhead in your organization. That allows you to tell donors that a larger percent of their donations will go directly to the programs that they care about.