Online Extra: Charity Begins with Due Diligence

No sense giving your money away without doing the same legwork you'd do for any investment. A reliable outfit will welcome the scrutiny

By John Tozzi

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You wouldn't buy a stock without doing some research on the company first, right? Well, the same applies to donating to a charity. Whether you're Donald Trump or Joe Sixpack, philanthropy experts say the key to making your contribution count is to think of it as an investment. "I'm continually amazed by the number of smart people who make their money with amazing deliberation and thoughtfulness and counsel, and then basically give it away by throwing it out the window of the car," says Trent Stamp, president of Charity Navigator, an online database that evaluates more than 5,000 public charities.

Like companies, some charitable organizations are efficient, sustainable, and poised to grow, with real results to show for their dollars spent. Others achieve little but spend lots of money on advertising, fund-raising, and executive salaries. Before you contribute, you should scrutinize your chosen organization so you know your money will be invested well.

Last year Americans donated more than $295 billion to 1.4 million public charities, religious groups, and other nonprofits, according to Giving USA. That's more than 2% of gross domestic product. With so much money flowing to so many groups, deciding where to start can be daunting for a novice philanthropist.

Match Challenge to Donor

  Donors should first decide what they want their gifts to accomplish. For example, you might aim to cut homelessness in your town in half or send 10 students to college, says Stamp. "In the same way, when you went to invest, you didn't just say 'I want to save some money.' You said, 'I want to send two kids to college and retire when I'm 58.'"

The scope and size of the group you choose should match your priorities as well. If your focus is local, look for charities active in your neighborhood or city. But if you want to tackle broader problems—like curing cancer or stemming global warming—seek out organizations equipped for the challenge. Don't assume that a charity with the biggest brand name is the best choice—the high profile could just reflect a big ad budget. "The vast majority of great work in this country is being done by groups you've never heard of," says Stamp.

Once you identify your goal and the type of organization best positioned to achieve it, do some research. Get information from sites like Charity Navigator or GuideStar, which has data for 1.7 million organizations, including the annual 990 reports that tax-exempt nonprofits file with the IRS, and in some cases audited financial statements.

Read the Annual Reports

  How much vetting you do will depend on your comfort level and the amount of your gift, but the more you learn about the charity, the more confident you can be that its goals align with your own. Read annual reports, visit the group's Web site, call and ask to speak to officers. If the organization is local, take a field trip. And if a charity is reluctant to give you information or open its doors, that should be a signal that they may not be the best stewards of your money.

By the end of the process, you want to understand how your contribution will translate into action. "You should be able to articulate to yourself what this organization does, how they measure their progress, and how they're doing toward their goals," says GuideStar President Bob Ottenhoff. "You don't want to be swayed by marketing slogans or pretty pictures, but you want to really get a good sense of that organization's activities."

Unlike financial investments, charitable investments should not be diversified. Once you've found one or two organizations that will work toward your goals, you can generate the best return on your donations by concentrating your giving. And if you have the means, give year-round. Although 50% of donations are made between Thanksgiving and New Year's Day, contributing consistently, perhaps with a monthly automatic payment, will help your chosen charity plan throughout the year.

A few other guidelines should govern your philanthropy. Check out the group's privacy policy to see whether your name and address will be kept confidential or how you can opt out of letting the charity sell your information. Beware of groups with names that sound similar to reputable charities—often scams or, at best, less effective organizations try to piggyback on a well-known name. Don't give in cash: Donate online or by mail, and always get a receipt. Avoid direct-mail appeals and never give in response to a phone solicitation."You would never buy a stock from a guy who calls you on the phone and says I have a hot tip for you," Stamp says. His rule of thumb: "f it feels wrong in any way, then it is. Walk away."

Tozzi is a freelance writer for

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