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Should we invest in an endowment?

Your Legal Questions Answered

Should we invest in an endowment?

Our 501(c)(3) food bank was very successful in raising funds during the pandemic. Our cash on hand grew from $44,000 to nearly $100,000. We are considering moving some of this money from a non-interest-bearing checking account to an interest bearing account. We are also discussing starting an endowment. The question some board members ask is: “since all this money was given to us to help others in need, is it appropriate to invest some of the money, maybe $25,000, in an endowment?” 

I don’t know what your average monthly expenditures are, but many nonprofits, particularly smaller nonprofits, struggle to maintain adequate cash reserves to handle financial emergencies and financial opportunities. Accountants can usually recommend a reasonably safe level of reserves for an organization, depending in part on the relative security of your income stream, but often the recommendation is as much as six months of operating costs. 

I would consider maintaining adequate cash reserves a way of assuring that you can continue to help others in need for a long time, and would not feel a necessity to spend all of it just because it is technically available to spend.  Even if you kept the entire $100,000 as a reserve, measuring your need by months of operating costs, it sounds as though you are a relatively small organization where adequate available reserves would be particularly important. 

Fortunately, you probably can’t invest any of this $100,000 into a true “endowment.”  Only donors can create an endowment, by making a restricted gift to be held in perpetuity and from which only a portion can be spent for current needs.  Unless you solicited specifically for endowment money and are governed by the Uniform Prudent Management of Institutional Funds Act, where the terms of the solicitation can set the terms of the gift, your board cannot put a “permanent restriction” on any part of this cash.  Since the board could “unrestrict” the funds at any time, at the most it would be considered “quasi” endowment that the board could make available for spending.

I am not a fan of endowments for small charities where the margin between survival and dissolution can be very narrow. To have money sitting in an untouchable account when it could be used to save the organization is not an enticing prospect.

Although you won’t make much money these days investing in an interest bearing account, it is a good idea and good financial discipline to be sure that you earn something on reserve funds not needed for daily needs.  As you grow your base of assets, an endowment may become a more attractive option.

Tuesday, August 10, 2021


I don't think it is very responsible to have so much money earning practically nothing in check-cashing. They need a new treasurer. CD's are available to non- and are guaranteed. Start a CD ladder If need be, in an emergency, they can be withdrawn. Also ultra short term ETF funds provide a return with some market price risk. This is the new money market with no federal insurance

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