For many nonprofits, financial planning is an ongoing challenge. Inconsistent funding streams, unpredictable donations and economic downturns can make long-term planning difficult. One powerful tool that nonprofits can use to safeguard their future is an endowment. Establishing an endowment not only creates a steady income stream but also ensures the organization’s mission continues long into the future.

At its core, an endowment is an investment fund designed to generate consistent income for a nonprofit. By investing for the long term, an organization can draw down a portion of the fund’s earnings each year – typically around 5% – while leaving the rest to grow. This means that even in years when donations slow down, the nonprofit can rely on its endowment to help cover essential expenses, such as operations, programs or specific mission areas.

Advantages of endowments

For nonprofits, the ability to plan is another significant advantage of an endowment. Rather than focusing solely on short-term fundraising, organizations with endowments can think strategically about their growth and impact. With a consistent income stream, they can expand their programs, invest in new initiatives and ensure they remain vibrant for years to come. This forward-thinking approach allows nonprofits to shift from a reactive to a proactive stance, making long-term sustainability more achievable.

Beyond financial stability, endowments also can be a powerful tool for attracting major donors. High net worth individuals often seek ways to make lasting contributions to causes they care about. By contributing to a nonprofit’s endowment, donors can ensure their gifts continue to support the organization into the future. This “legacy giving” approach is especially appealing to donors who want to see their impact endure.

Defining the purpose

Setting up an endowment requires careful planning and thoughtful execution. The first step is for the nonprofit to define the purpose of the endowment – what the funds will support. From there the organization can set a spending policy governing what percentage of the funds will be withdrawn each year.

Having a clear goal in mind not only helps guide the organization’s fundraising strategy but also gives donors clarity on how their contributions will be used.

Once the purpose and withdrawal parameters are established, a nonprofit must develop an investment policy to govern how the endowment funds are managed.

This policy should cover essential aspects such as asset allocation and risk tolerance, and support spending rules. Many nonprofits partner with financial advisors to create a sound investment strategy that aligns with their long-term goals. Working with professionals ensures that the endowment is structured in a way that best serves the nonprofit’s long-term goals.

Fundraising for an endowment may require a targeted approach. Engaging donors through specific campaigns, legacy giving programs and events can help raise the necessary capital to build the fund.

Financial stability

Nonprofits should focus on the long-term impact of contributions, showing donors how their gifts will have a lasting effect.

Successful campaigns often emphasize the idea that an endowment isn’t just about today – it’s about creating a future where the organization’s mission can thrive.

Establishing an endowment can be transformative for nonprofits.

For organizations in the Tri-Cities and beyond, an endowment provides the financial stability needed to weather economic fluctuations, attract major donors and plan with confidence.

With careful planning, professional guidance and a commitment to long-term sustainability, an endowment can become the foundation for lasting success, ensuring the nonprofit’s mission continues to make a difference for years to come.

Stuart Gillin, a certified financial planner, is an assistant vice president, family advisor and investment advisor at Baker Boyer Bank in the Tri-Cities.