No one has ever accused me of being a math whiz. In fact, numbers seem to roam around my brain, sometimes reconfiguring themselves in strange ways that have little to do with reality.
In fact, in all the years of my capital campaign work, one of my most challenging feats was keeping campaign goals straight. Was it $1,500,000 or $2,250,000? $500,000 or $120,000,000? And I must confess to forgetting or confusing campaign goals more than once in my lengthy consulting career.
So when this morning, a client from years past sent me an e-mail telling me how he still appreciated and relied on the formula I had come up with for an organization’s endowment, it made me chuckle.
But chuckle or not, when I look at that formula again, it makes perfect sense as a place to start thinking about developing an endowment goal. And if these particular numbers make perfect sense to me, I guarantee they’ll make perfect sense to you.
How big should your organization’s endowment be?
It’s simple. It should be two times the amount of your annual budget.
If your annual budget is $2 million dollars, your endowment should be $4 million.
If your annual budget is $500,000, you should build an endowment of $1,000,000, and so forth.
Because if your endowment is twice your operating budget and if you take 5% of it out each year to spend on operations, you’ll be able to count on income from your endowment to the tune of 10% of your operating budget each year.
More than that amount, and organizations run the risk of becoming fat and lazy. Less than that, and it’s a hand-to-mouth existence every year.
Let’s run the numbers:
Say your operating budget is $1,000,000.
Two times $1,000,000 is $2,000,000
5% of $2,000,000 is $100,000.
Bingo! $100,000 is 10% of your operating budget.
And the same will be true no matter what your operating budget. Try it.
Why is this ideal? Three reasons:
- A lovely simple formula like this gives you and your board something clear to shoot for, and endowment seldom seems clear.
- Because it’s based on your annual budget, it gives you a clear reason to grow your endowment as your organization grows.
- Having an endowment goal to shoot for gives you good reason to work on getting planned gifts. Without a goal, they often fall by the wayside.
I tried out this formula with my friend, Tony Martignetti, a planned giving specialist, and he tells me in no uncertain terms that it’s too simplistic. The stock market ebbs and flows, and organizations that are serious about their endowments should evaluate and adjust their spending rate each year. Alas, like most things in life, endowments are not really so simple.
But, as a way to start thinking about an endowment, my simple formula will give your board members something to grab onto that makes sense.
Believe me, if I can make sense of it, anyone can!
And when thinking about endowment, never forget the sage words of one of the wonderful old whales of fundraising, “Where’s there’s death, there’s hope…”
I agree with Tony that this guideline is simplistic, but I don’t agree that it’s too simplistic. Its simplicity is what makes it so powerful. As a goal for organizations just starting an endowment, a simple target like this can be just the motivation a board needs. Once an organization has gotten to the 2X operating budget level, it can then fine-tune its needs more precisely, if necessary.
- Lindsay Nichols
The more crazy-busy I am, and the more complicated the world seems with its gush of information and high speed of transfer, the more I crave what is simple–not just about endowment, but regarding many things. Clear, simple ways of thinking rescue me from the muddle of overload.
I’m so glad you find my formula useful. I hope others will too.
Andrea, indeed your math is better than mine. Current market fluctuations should bear negligible end results. I find your method works as a great baseline.
The fpreceding is a guest blog by Andrea Kihlstedt, co-founder of Asking Matters. Andrea Kihlstedt was a capital campaign consultant for more than 25 years. She has written two books on fundraising and she cofounded Asking Matters, an invaluable resource that teaches people how to ask for donations in a natural way that complements their own personal Asking Styles.