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Should I Donate
April 6, 2015

Someone knocked on your door and asked you for a donation.  Should you give him some money or send him away?  His organization supports many good charities, but there’s one of them that you don’t like.  So you tell him, "No, because you’re going to use some of my money to help XYZ charity."  That's when he tells you, "No problem, all you have to do is to tell us where you want your money to go and we'll make sure that none of it goes to XYZ."

That sounds like a pretty good idea.  You get the best of both worlds.  You're able to help the charity that you like and keep your money away from the charity that you don't like.  So you give him your money and tell him which charity you want it to go to.  But did you just make a mistake?

Probably, Yes!  You were told that your money would go directly to the charity that you like and that none of it would go to the charity that you don't like.  How can that be a mistake?  It was a mistake because you didn't understand how most organizations distribute the money they receive.

Here's the problem.  While many, or most, charitable organizations will tell you that they will honor your request, it's just not how the system works.  In order to understand the problem, you need to understand how charitable organizations distribute the money they collect.

Virtually no charitable organization waits until they get your donation before they decide what to do with it.  The distribution process actually starts well ahead of when they begin asking for money.  It begins late in the prior year when management picks the charities they're going to help and sets the goals for how much their organization is going to help each of them. 

In general, that means that the management team first reviews the list of charities they are supporting and then decides whether or not they want to make any changes.  If it sounds like the list is a collection of "personal" choices, it's because it is.  The list is the result of the likes and dislikes of the current management.  If they like a charity it will be on the list.  If they don't like a charity then it won't be on it.

The next step in the process is critical to what happens to your donation.  This is when management decides how much money they will be giving to each charity for the coming year.  The goals they assign are partially the result of how well they've raised money in the past, the pressure from the receiving charities, and the personal preferences of management.  The goals then become the target support goals for each of the charities for the coming year.

In order to keep an example simple, let's consider an organization that supports only two charities, the charity that you like and the charity that you don't like.  The organization is expecting to raise $200,000 over the next year.  During the planning process, they decide to give each of the charities $100,000. 

Assume that it's late in the donation year and that they have received $190,000 so far in donations (after expenses).  Now they come to you for a donation.  You donated $10,000 to go only to charity "A".  That way you will be encouraging the work of charity "A", and discouraging the work of charity "B."  However, watch what actually happens.

After the organization has received your donation and they have the $200,000 they intended to raise, they begin to write the checks to the two charities.  As planned, they write a check for $100,000 to charity "A" and a check for $100,000 to charity "B".  Notice that they didn't write a check to charity "A" for $105,000 (half of the $190,000 plus your donation of $10,000) and a check for $95,000 to charity "B".  Both charities received the same amount of money. 

So how did your donation encourage charity "A" and discourage charity "B?"  The answer is, it didn't.  Your donation simply helped both charities.  If you had not donated the $10,000, each of the charities would have received only $95,000, $5,000 short of their goal.  Your donation helped both charities because the process allowed the organization to move someone else's money to support charity "B."

So how do we support the charity that we like without helping the charity that we don't like?  Well, the one thing that we can't do is to give our money to an organization that supports both charities.  Even though they promise to keep our money away from the charity we don't like, the system allows them to covertly help whichever charity they want.

It would seem that the only way you can support the charity of your choice is to contribute directly to it.  However, you need to know that one of the factors used to determine how much support your charity will receive, is its need.  That's important to know because when you contribute directly to the charity of your choice, you reduce its "need."  But then, that's another story.

Roger Cruze