How are funds used?

Donated funds are used for three main purposes by charities: program expenses, administrative expenses, and fundraising. How the funds are allocated depends on whether the donation was unrestricted or restricted by the donor. You can research how a specific charity allocates its funds using watchdog sites like Charity Navigator and GuideStar.

How donated funds are allocated

Program expenses

These are costs that go directly toward a charity's mission and purpose. Examples include:

• Materials and supplies, such as food for a community pantry or equipment for programs

• Staff salaries for professionals who deliver services, like counselors at a clinic or teachers at a non-profit school

• Direct assistance, such as paying for meals for a homeless family

• Travel and technology to implement programs

Administrative expenses

Also known as overhead, these costs cover the overall operations and management of the organization. They allow a charity to function and include expenses such as:

• Salaries for management, accounting, and human resources staff

• Office rent, supplies, and utilities

• Insurance and legal fee

• Evaluation and planning to improve the organization's work

Fundraising expenses

These are costs related to acquiring donations and maintaining relationships with donors. Examples include:

• Marketing and advertising to attract donors

• Staff salaries for fundraising professionals

• Costs associated with fundraising events and campaigns

Unrestricted vs. Restricted Donations

• Unrestricted Donations: The charity can use these funds however they see fit, within IRS rules. These funds are particularly valuable as they can be used to cover administrative costs that are often underfunded.

• Restricted Donations: The donor specifies how the money should be used, and the charity must adhere to these instructions. For instance, a donation could be restricted to providing scholarships for students.

Finding out how a specific charity spends its funds

You can research how a particular charity allocates its budget by checking:

• Charity Navigator: Provides ratings and information on charities, including a breakdown of how they spend their money, such as the percentage spent on programs versus overhead.

• CharityWatch: This watchdog organization has a "highly efficient" rating for charities that spend at least 75% of funds on direct programs and less than 25% on overhead.

• Candid (formerly GuideStar): Offers resources for donors and nonprofits, detailing a charity's commitment to transparency.

• The Charity's Annual Report: Many charities post their annual reports and financial statements on their websites, which should provide a breakdown of how funds were used.