Thursday, February 23, 2017

Pay Yourself First

As a child, I remember my father often saying to me in his deep, authoritarian voice, “hey kid, always pay yourself first.” What he meant by that was to be sure to put money away for a rainy day. So, starting when I was pretty little, I squirreled away a little bit of the money I’d get for my birthday from a relative. As I got older, I continued the practice and saved some of my babysitting money and then part of my lifeguard salary. It wasn’t always easy to save when my friends wanted to go to the mall or go see a movie, but for the most part, I followed my dad’s advice. 


Recently, I was at a financial sustainability seminar for nonprofits and the concept of paying yourself first came up. The speaker made a strong argument for why charities must follow this principle. And it dawned on me that while I’ve long believed that charities should have a rainy day fund, I never thought of it as the same exact rule my father taught me as a child. 

Maybe, like me, you can recall that influential person in your life that taught you the importance of saving. But even if you can’t, I want you to consider how important this concept is for charities and why, as a donor, you should support them in their endeavor to squirrel away a little money now and then - even when it might be a difficult choice to make (like when I had to forgo a trip to the movies to see E.T.). 

In our rating system, we measure each charity’s working capital ratio - essentially its rainy day fund. We recommend that charities have a good 6 months to a year of reserves to fall back on when times get tough. Why? Because sustainable charities have the flexibility and strength to plan strategically and pursue long-term objectives. 

I know this to be true from first-hand experience. Once, I worked at a group that forgot to pay itself first when times were good. When revenue unexpectedly dried up, and with virtually no savings in the bank, the organization was constantly scrambling to make payroll and meet other short-term financial obligations. I saw with my own eyes how such organizations are not well-positioned to excel and make good on their missions. 

Charitable giving will always ebb and flow. And charities can’t always predict when it will constrict. So, if you want to ensure that your favorite charity can weather the next storm, then advocate that they build a reserve. Moreover, step up to the plate to help fund their plan to save. You could even go so far as to tell the charity that you’d like them to save a percentage of your next donation for the future. Working together in this way, donors can help charities build the necessary reserves to avoid having to cut their programs or reduce their staff the next time giving dips. 

So, I’ll end this post with my own twist on my father’s words of wisdom, “hey charity, always pay yourself first.”

3 comments:

Ryan Heneise said...

That's such good advice. Now that I have kids and I'm helping them to learn how to manage money, one of the things that we do is to make them divide up their money into three envelopes - save, give, and spend. They always have to fill the save envelope first. I love the phrase "pay yourself first" - I'm going to start using that.

Back on topic... I know that all nonprofit leaders certainly understand that the finance of running a nonprofit responsibly. But I'm always amazed to see the little ways in which the word "non-profit" creeps in and changes the way people think about profitability. Indeed there is pressure from many different angles to squeeze every dollar for everything it's worth, and setting money aside (not spending it immediately on mission) can be seen as waste or inefficiency. Designated funds can often complicate the matter further. It's easy to assume that nonprofits shouldn't be profitable, but as you say nothing could be further from the truth. I'm a huge advocate for operating charities as a business (in a businesslike way) and an important component of this is making sure you have enough working capital to continue to do your charitable work even when revenues are down.

amylynn1022 said...

While I think this is good advice, I wonder how you would convince a charity to do it, especially one that is young and growing and feeling like there isn't enough money as it is. I ask because there are a couple of organizations I would like to donate to but I am hesitant to because they are always begging for money. And by begging I mean "If we don't receive $10,000 in donations by midnight tomorrow we are going to have to stop our work". And they send out a message like this at least once a quarter. Whether or not it's true it make them sound like they aren't well managed.

I am also wondering how charities solicit these kinds of donations, especially when they are in a tight time financially. "Hey can you donate to our rainy day fun and help us make payroll this month?" isn't likely to be effective. Maybe set up an endowment and solicit funds for that?

Sandra Miniutti said...

Building a reserve is a process. It isn't going to happen overnight - especially for a new charity. The next time you give to one of those charities, consider earmarking some of your donation to reserves. That's one way to help the charity get the ball rolling.
But, you are right, if they don't have enough to make payroll next week, then they're not going to have the luxury to add to a reserve fund.