LA Story and More on the Challenge of Charity
One was refusing to eat. The other was smearing yogurt on her face. The toast was burning. And Baxter, the 160-pound mutt, was humping my leg.
Of all the childrearing experiences we’ve been reliving on this trip to LA, getting the grandkids off to preschool in the morning has been the most traumatic.
By the time the twins finished breakfast, most of the food was on the table. We had an hour left before they had to be in school. They hadn’t yet bathed or dressed. And they were still hungry. What to do?
Welcome, yet again, to my morning slog, where I work out problems, big and small, including those I’m having with the 28 books on my to-finish-before-I-die list.
On Monday, I shared the first part of an essay I’ve been working on for one of those books – The Challenge of Charity. Here’s the second part.
The Challenge of Charity: A Good Reason to Say No
I not only had a philosophical objection to giving my friend the $50,000 he asked for, I had a pragmatic reason.
The money he was asking for was intended to cover a years’ worth of expenses for his non-profit – the cost of hiring mentors and providing various services to the ex-convicts the program was helping.
Giving him the money would not have fixed the problem. At best, it would have pushed it off for another year.
I asked him if he was looking to build an endowment for his program. He said he hadn’t thought about it.
“But you don’t want to have to go to the trouble of raising 50 grand every year,” I said. “You don’t want that kind of stress, do you? And what about when you die?”
He shrugged his shoulders.
The Endowment Decision
When I got into the charity business, I told him, I was funding projects the way he was about to fund his, covering expenses a year at a time. I did that without thinking much about it because I was in my 50s and death was an insubstantial theoretical. I was earning good money and enjoying my work. Contributing a portion of my earnings every year was easy. A no-brainer.
But when I hit 65, I had to face the fact that I would not live forever. More importantly, that before I died, I would probably be making changes that were likely to drastically reduce or end my income from working.
It was then that I realized I needed to establish an endowment. I needed to start an account that would be owned by our family foundation, but legally segregated and dedicated to funding the yearly expenses of the charities we were supporting.
I have a similar view of the businesses I’m in involved in. When it’s a business that I like (and I’m proud of), I get sentimentally attached to it. I want to see it grow and prosper. I want to do what I can to ensure that it will be around.
It’s not easy to do this with a business. You have to work to ensure that it is “anti-fragile.” This means populating its leaders with quality people – growers and tenders that have the same aspirations as you. It’s also a good idea to segregate some of the yearly profits into a war chest that can take the business through hard times. In my mind, that war chest is like an endowment for a charity. It needs to be large enough to cover significant unexpected expenses. It also needs to be protected from people in the future that could spend it unwisely.
Why Endowments Make Sense
“If,” I told my friend, “instead of raising money to cover the budget every year, you were able to build an endowment large enough to support yearly expenses from dividend distributions… then once the endowment were fully funded, you wouldn’t have to worry about yearly fundraising. You would know that your program would continue in perpetuity, even after you are gone.”
“Wouldn’t it be nice,” he said.
So I explained what I had learned about endowments. The first and most important point is about how much you need to pay for the program you are running.
For example, FunLimon (our family’s community development center in Nicaragua) has an annual budget of about $150,000 a year. That number will go up as we add a few more buildings and programs that we are currently implementing. I’m guessing the final budget will be about $200,000 in today’s dollars.
How much do you need to fund $200,000 in annual expenses?
Well, it’s not $2 million (as I naively thought, for a happy moment, when the idea of an endowment first came to mind). Two hundred grand is 10% of $2 million, and the stock market has a long-term history of yielding ROIs of 10%. But the stock market is volatile. And taking out anywhere near 10% would be disastrous. The conservative number is somewhere between 3% and 5%.
I decided on 4%. And 4%, as you know, is a 25th of 100. That means the endowment must be 25 times larger than the $200,000 yearly budget. It has to be at least $5 million. To be safe, I set the target at $6 million.
“The good news,” I told my friend, “is that your budget is only $50,000. That means you only have to raise $1.25 million to fund your endowment.”
He didn’t react. Perhaps he was shocked.
Why Endowments Are Attractive to Big Money
So I kept the (by this time one-sided) conversation going.
“But here’s something I have learned about raising money for charitable programs,” I said. “Sophisticated businesspeople and investors understand the value of financial war chests. They are much more inclined to contribute mega-bucks to endowments than to covering yearly expenses.
“This is also true for large non-profits that allocate money for smaller programs,” I said. “They are more likely to write million-dollar checks for the endowments of worthy programs than for transactional programs, however worthy they may be.
“There are billions of dollars out there right now in funds looking for charitable investments. If you could put your energy into getting some of them to help you fund your $1.25 million endowment, I can’t imagine you wouldn’t be able to have it fully funded in just a few years.”
We talked about how he could do that, how he could identify possible donors and present them with the right kind of pitches, proposals that would fit into their stated purposes. Writing such proposals is not rocket science. And I pointed out that there are lots of books and reports and experts out there that could teach him how to do it.
The takeaway – for me, at least – is that if you want your for-profit business or non-profit charity to survive you, you need to figure out how to (gradually) create a financial war chest that is at least 25 times your yearly nut.
Problem solved. So now, back to the kitchen table…
I don’t know how I thought of it, but I remembered an interview with Marie Kondo, the adorable author of The Life-Changing Magic of Tidying Up and star of “Tidying Up With Marie Kondo” on Netflix. The interviewer asked Kondo how she had time to do everything she was doing and take care of a house and two small kids.
Kondo said that she had taught her kids to do their own chores. The interviewer was skeptical. These were three-year-olds (like our twins). But Kondo said that they actually liked cleaning up. They even sorted their own clothes, folded them, and filed them neatly, Maria-Kondo-like, in their wardrobes.
So I brought a spray bottle of window cleaner and a roll of paper towels over to the table and challenged the twins to clean it up themselves. One was reluctant. The other took the bait. Two minutes later, the other one wanted in. Five minutes after that, the table was squeaky clean.