Want Your Charitable Donation to Actually Help Someone? 4 Questions to Ask Before You Give

If it's been a good year, make sure you maximize your impact by donating effectively.

By Michael Faye

Opinions expressed by Entrepreneur contributors are their own.

U.S. wealth grew by $19 trillion since the start of the pandemic. Simultaneously, the pandemic pushed 150 million more people into poverty. This was the first increase in over two decades. The poverty gap — the amount needed to pull everyone out of poverty — is about $95 billion. Each of us has an opportunity to transform a life, and it doesn't need to cost much.

I've worked in anti-poverty for more than two decades. I joined the field of development at a time when economists were starting to apply rigorous academic methods to the study of poverty. In the course of this work, I've seen organizations find impactful solutions to hard problems. I've also seen waste and negligence: consultants hiring contractors hiring subcontractors; basketball courts and latrines rusting away. We've all heard the stories.

It doesn't have to be this way. This year, if you want your donation to make a real difference, ask these four questions before giving to charity.

1. Do you understand exactly where your dollar goes?

Charity financials are unfortunately opaque — occasionally deliberately, but more often by the very nature of accounting standards, whereby buzzwords like "overhead" are baked into the filings. The problem: "overhead" is a somewhat meaningless term that can be defined by the company management (see more here). Making things even more confusing, the accounting rules don't require the charity to trace a dollar through the entire system to the person receiving aid, which is what we should care about. Instead, organizations can simply send money to another operating partner and report this as an "operating expense" (i.e., the good, non-overhead one). But this doesn't tell us anything. They could simply be sending money to a friend's charity. At the end of day we need to figure out where the money is going. Odds are you won't be able to find it, so ask for a tracking of each donation.

Related: How to Make Charitable Giving a Winning Business Strategy

2. What is the evidence this works?

The trickiest aspect of running a nonprofit is the lack of a natural feedback loop. If your company makes a product and it doesn't work, people stop buying it. If you sell a service that no one needs, no one calls. If a nonprofit gives people something that doesn't help or isn't needed, no one finds out. With the right PR, donors will keep giving and people in poverty will continue receiving unhelpful resources, or nothing at all. A potential lose-lose! Ask yourself: how does this charity know they have a real impact on health, income, or education? Look for evidence, not anecdotes. We can't all be research scientists, but we should expect to see charities working with some. If a charity hasn't run and posted rigorous studies — not just surveys — then wait until they do. You wouldn't want to take a vaccine that wasn't tested. Why would you push interventions on people in poverty that haven't been either.

3. Does the organization have capacity to use your funds? Can they scale?

The first question is obvious: If this organization can't use their funds quickly, odds are there is another charity that will. Poverty is an urgent problem and people experiencing it can't afford to wait. But beyond your funds, we want to be supporting organizations building systems that will help distribute billions of dollars of aid. So ask whether the organization will be able to grow. Historic growth and proven ability to scale is probably a good predictor, but look for clear plans on what they'd do with two, five, or ten times the budget they have now.

4. Does this charity empower people with choice?

This one is more philosophical than the rest, but equally important. Traditionally, charities gave the power to the donor, who got to choose what the recipients needed. Different donors might have different interests or moral preferences: Some might decide to provide school uniforms, while others provide food or bednets. But why not give that choice to people living in poverty? They probably have a better sense of their needs than you or I do; and not surprisingly, these needs differ by person. Even within the same village, some people will spend on education, some on homes, and others on businesses. In other words, your most important choice may be whether to donate that choice itself to the poor — via direct cash transfers — and let them choose.

Asking these questions takes more time than simply clicking "donate" when you get an appealing email. Don't think of this effort as a labor to avoid waste; think of it as an opportunity to do the most good. Explore charity evaluators like GiveWell or The Life You Can Save. You can also discuss these questions as a family or group to save work, and have some good conversations. A little scrutiny can make a big difference in the lives of people in poverty. The most important thing is that we give generously, give effectively, and give now.

Related: Why You Should Consider Donating Your Cryptocurrency to Charity

Michael Faye

Co-founder and CEO of GiveDirectly

Michael Faye is the co-founder and CEO of GiveDirectly, the fastest growing nonprofit of 2020, and TapTap Send, a cross-border financial platform for the frontier markets. He has a PhD in economics from Harvard University.

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