During boom years, even the smallest NGO can be found putting money away into an endowment, a reserve fund, or just a savings account. This money is invested in mutual funds or certificates of deposit and, with a little tending, the principal grows, sometimes dramatically. Endowment income can be a reliable part of an organization’s annual needs, and for organizations with large endowments, the endowment gains can be a major part of income. During bust years and dramatic stock market downturns, putting money aside is less popular and thought to be less possible.
Just as a family or an individual saves for retirement or hard times, any organization that possibly can should put some money aside. Institutions that should be permanent fixtures in the nonprofit landscape need to start endowments. There are ways to invest the principal in an endowment safely and to ensure both long-term growth and some income.
An endowment is a permanent savings account for an institution. Money is put aside as principal, and a small percentage of that principal (traditionally 5 percent) is used for the annual needs of the institution. In years when the principal increases more than 5 percent, the value of the overall endowment increases accordingly, which then increases the amount the organization can use while still staying at the 5 percent figure. In years when the principal does not increase by 5 percent, the organization can still take out ...