The Five Mistakes Donors Make (and How to Fix Them)

By many measures, Americans are among the most generous people in the world, giving about $300 billion to charities every year to help those who are less fortunate or to otherwise make the world a better place. Unfortunately, all that generosity does not have the world-improving impact that it should, because the vast majority put almost no effort into deciding where to give. Only 35 percent of donors do any research when deciding how to give, and only nine percent spend at least two hours per year researching causes and the organizations they champion. This may be because many people don't know how to identify the charities that are able to do the most good with every dollar donated. Not many of us have expertise in evaluating charities, but this lack of involvement is a cause for concern. Most people can greatly increase the impact of their giving by avoiding a few simple, but very common mistakes.

Mistake 1: Being limited by personal experiences. Many donors only consider a very small set of nonprofits relevant to their personal lives, such as their alma maters, health organizations fighting illnesses that have touched their lives, and local nonprofits they've seen in action. This approach eliminates the vast majority of charities, but is based on criteria that have nothing to do with how much good can be done with the donation.

Fix: Be open to causes and charities beyond those you naturally gravitate toward. The charities most people know well probably make up less than 1 percent of the universe of nonprofits. The charities that are best at helping others are not necessarily those that have touched your life or are good at media and public relations. Though it isn't necessary to examine every charity in the world, most donors eliminate entire classes of charities too quickly. Approach giving with an open mind.

Mistake 2: Over-emphasis on overhead. Nobody wants their donations to be wasted on overhead costs. Some charity rating agencies put a substantial weight on extremely low overhead costs. Don't be fooled. Just because a charity spends little on overhead doesn't mean it accomplishes very much.

Fix: Overhead costs are necessary for most nonprofits, and higher overhead costs may even facilitate better programs. Do you really want to donate to a charity with antiquated computer systems that create inefficiencies, low-quality staff due to below-market salaries, and financial weakness from a lack of fundraising? Extremely low overhead costs may be just as harmful as high overhead costs. Overhead is just one way of evaluating charities, but ultimately donors should focus their attention on the quality of the programs and the results achieved.

Mistake 3: Putting financial handcuffs on charities. Many donors make restricted gifts, earmarking them for specific programs rather than allowing charities to determine how to use the money. A common example is when donors earmark donations for relief efforts in response to a recent natural disaster, like Typhoon Haiyan; though the intention is good, in practice it forces charities to spend their budgets according to donor preferences, rather than actual needs. (In the specific case of disaster relief, it is well-known among aid agencies that disaster relief is typically less efficient form of humanitarian aid that many global health programs due to the logistical challenges providing emergency aid when local infrastructure is destroyed.)

Fix: If you have enough confidence in a charity to donate to it, you should allow it to decide the most effective ways for it to spend its own budget. Make unrestricted gifts. If a natural disaster inspires you to give, consider giving to an organization that does both disaster relief and developmental aid (like UNICEF or Oxfam), and let them decide where your gift will be best used.

Mistake 4: Giving to rich countries -- specifically, Americans giving to help other Americans. I love this country and know that there is still a lot of room for improvement. But the 25 poorest countries in the world have per capita GDPs below $1,700 while our country's is over $48,000. The poorest countries have people getting sick and dying from problems we virtually eliminated a century ago. There are very cheap, effective solutions to address these problems. Charities that work in the third world can do a lot more with your donation than can organizations here in the U.S.

Fix: Realize that charitable giving isn't just about helping your neighbors, but whoever is most in need -- especially when the solutions are well-known and easily implementable. On a dollar-for-dollar basis, being open to opportunities in other countries can provide more benefits to more people.

Mistake 5: Arrogance. Even by avoiding all of the mistakes above, most donors should realize that they still don't have the expertise to evaluate the effectiveness of nonprofits.

Fix: Rely on independent charity evaluators that rate the effectiveness of charities, such as GiveWell, Innovations for Poverty Action, and Giving What We Can. These are organizations that spend a significant amount of time figuring out which charities do the most good, and their research is worthy of consideration. Though many donors may not want to fully outsource their giving decisions to one of these charity evaluators, donors can use their research as well as the knowledge from the other "mistakes" and "fixes" described in this article as a valuable resource to improve their giving.