Nonprofits spend a lot of time, energy, and resources to earn the money necessary to fund their missions. At your organization, you’ve developed a fundraising strategy that helps you earn everything you need to support your programs while putting money aside in a reserve fund in case of hard times.
However, reserve funds sitting in a savings account or money market fund could rapidly lose value due to inflation. And even if inflation wasn’t an issue, these funds aren’t directly benefiting your organization by sitting stagnant.
That’s why organizations turn to nonprofit investment opportunities.
While investing may initially seem confusing and challenging for nonprofit organizations, it’s a great way to put your reserve funds to work and raise more money for your mission. In this guide, we’ll cover how to determine the best investment solution for your nonprofit and how to get started.
Know Your Investment Options
Nonprofits can and should have money set aside that can be used in the case of an emergency. Many organizations saw the incredible value of their reserve funds when fundraising became a challenge during the one initial of the COVID-19 pandemic. This funding shouldn’t just be leftover from your budget when you raise more than expected, but intentionally set aside as a safeguard for your organization.
Generally, when nonprofits look to invest their reserve funds, they’re doing so to protect against inflation, build their assets, save resources for the long term, or find new ways to court large gifts.
Depending on your organization’s goals, you’ll need to choose between different investment options. Consider where you’ll invest, what to invest in, and if you’re looking for out-of-the-box investment opportunities. Let’s take a look at the options for each of these considerations.
Where to Invest
The first consideration your nonprofit will need to make is where to open an account that allows you to invest your funds. Traditionally, there are five options for where to invest:
- Big banks: While they have name recognition, big banks also often have tedious paperwork and high fees.
- Wealth advisors: Advisors take the responsibility out of your hands, but rarely beat the market in their chosen portfolios and often have high percentage-based fees.
- DIY brokerage accounts: This might be a great way to save on fees, but it’s often not considered best practice. Not only can it raise potential conflicts with board members, but it also requires a lot of time and energy to conduct the necessary active oversight of the accounts.
- Money markets and deposit accounts: Generally, money markets and deposit accounts have lower percentage yields, but are a safe option for the cautious nonprofit.
- Nonprofit-specific accounts: Some advisors will help you open a nonprofit-specific investment account and help ensure you have all of the necessary components to maximize the opportunity. They’ll also help you make the right investment decisions to align with your organization’s goals and preferences.
Wherever you look, be sure to ask if the organization has experience working with nonprofits. Investment advisors with nonprofit experience can make a huge difference in helping you invest your funds in a way that will best help you reach your goals.
What to Invest In
Next, you’ll need to decide what types of securities your nonprofit wants to invest in. The type of portfolio you build should:
- Reflect your nonprofit’s mission.
- Help your organization raise funds.
- Align with your nonprofit’s values.
For example, a nonprofit organization focused on conservation issues may not want to invest its money into an oil company that uses fracking to obtain resources. This would completely contradict their mission and values.
Therefore, many nonprofits focus on investing in ESG (environmental, social, and governance) stocks. These companies value the additional impact the company makes beyond their product or service, including their carbon footprint, the way they treat their employees, and other significant considerations. Nonprofits may also choose to invest thematically—where they pick stocks based on a specific theme or industry or based on the larger impact of the companies.
More Investment Options
There are more options to investing other than simply picking stocks in some well-performing companies and hoping for the best. Some of the other considerations for investment options include:
- ETFs and Index Funds. ETFs and index funds track certain groups of stocks on the stock market. One of the most common of these pooled investments is the S&P 500, which pools the top largest 500 companies in the stock market. Some ETFs follow this index fund or other common pooled investments.
- Endowments. According to Infinite Giving’s endowment guide, endowments are “dedicated source[s] of long-term funding made up of donated gifts that support the mission and work of a philanthropic organization.” The principal money in an endowment is invested and a portion of it is taken out each year to support the nonprofit’s mission. This portion is usually out of the interest earned on the fund over time.
- Cryptocurrency. With the right investment solution, your nonprofit can accept gifts of cryptocurrency to support your mission. This will help you open up a new method of giving and raise large funds from another income source.
Initially, you should set goals for your nonprofit’s investment accounts. Then, consider your options about where you want to invest, what you should invest in, and the additional opportunities you want to open up regarding investing. This will start you on the right path to the best solution for your nonprofit.
Investment Solution Features to Look for
When you look for your nonprofit’s investment solution, you’ll need to make sure that the solutions you consider will help your nonprofit achieve its goals without wasting precious time and resources. Here are some considerations to keep in mind as you evaluate different solutions:
- Fee structure. Fees associated with investing can hinder your growth over time if you’re not careful. Look for a low fee structure along with high earning potential to make the most of your account.
- Safety and security. Nonprofit risk tolerance doesn’t only apply to the riskiness of the investment portfolio you build. You want to reduce the risk associated with your investment solution as well. Look for ones with security certifications and ones that answer questions regarding data security appropriately for your risk appetite.
- Access to a trusted advisor. If your financial leaders have a lot of experience with investing, you might trust them to build the right portfolios for your nonprofit. However, it’s usually best to also get input from a trusted advisor wherever you decide to invest your money. Look for a solution with advisors with nonprofit experience so they better understand your financial situation and goals.
Before you set up an investment account, you’ll need to make sure you trust the organization or person you’re investing with. Ask for reviews from other organizations that have used that solution so you can feel confident that they’ll help you maintain a healthy financial standing and reach your fundraising goals.
Getting Started With Investing
The first step to investing is ensuring your nonprofit has the necessary amount of money in your reserve fund to begin the investment journey. You should have more than three months of your operating expenses in a reserve fund before starting to invest. In fact, a nonprofit in a strong financial situation would ideally have:
- A full year’s operating budget in their checking account
- Thirty to sixty days of operating reserves in a savings or money market account
- Between nine months and one year’s worth of operating reserves in a conservative, yet diversified portfolio of stocks and bonds
- Additional capital reserves that you don’t need for the next year or year and a half invested in another conservative, diversified portfolio
- Even more funds that can be used to start new programs, create a new portfolio dedicated to growth, or invest in an endowment for sustainability
But before you can jump into this ideal financial breakdown, your nonprofit will need to complete a few steps to get started investing. These steps include:
- Define your goals for your investment accounts. If you’re trying to increase capital reserves to combat inflation, your goals will be different than someone raising funds to make a large real estate purchase.
- Develop an investment policy statement. This will include your goals, policies, and other decisions about your investments, ensuring everyone on your team is on the same page.
- Choose where you’ll invest your money. Consider the options provided in the first section of this article to find the solution best suited to your nonprofit.
- Open your account. To do this, you’ll need to file an account application with basic information about your nonprofit, a copy of your articles of incorporation, and a copy of your 501(C)(3) IRS determination letter.
- Choose your portfolio. Review your investment policy statement to see what guidance you chose about maintaining your values and mission when investing.
- Promote opportunities to supporters. Promote opportunities for your supporters to donate stocks or create endowments (or micro-endowments) for your nonprofit now that you have investing opportunities. NXUnite’s marketing guide recommends a multi-channel approach to ensure you reach as many supporters as possible on their preferred marketing channels.
- Report on your results. You’ll need to report on your organization’s results for your investment team, your board of directors, stakeholders, and even your supporters.
Getting started with investments can seem overwhelming at first, but taking it one step at a time with your goals in mind is the best way to ensure you make the most of your accounts.
Keep in mind that the money you make on your investments will need to be reported on your annual form 990. Maintain meticulous records of your investment income and how it’s used to help your nonprofit. That way, when it comes time to file your Form 990, you’ll have all of the information you need to accurately report your investment income, which, if you chose the right solution and the right portfolio, should be plentiful!