Building a Nonprofit Investment Strategy: 4 Ways to Beat Inflation
From the cost of groceries to hikes in rent, we have all felt the impact of high inflation throughout 2022. In fact, according to some records, inflation reached an astonishing 9% in June, only dropping to 7% by November 2022. Every industry feels the pressure of this challenging economic period, including nonprofits. Nonprofit accounting teams everywhere have started building a nonprofit investment strategy to beat inflation and looking for ways to make their money work for them by investing it!
Yes, nonprofit organizations can and should invest their money in a stronger long-term savings plan. In this article, we’ll discuss how your nonprofit can use investment accounts as an alternative way to save more and beat high inflation rates.
1. Set concrete financial goals
Before you dive headfirst into an investment management plan for your nonprofit, you need to ensure you have a solid reason for doing so. As nonprofit organizations often run into more restrictions and limitations when it comes to accounting than other industries, setting concrete financial management goals will help you stay on track.
As a part of your goal-setting process, your nonprofit will need to make some internal decisions. For example, you’ll want to answer questions like:
- Which funds do you want to invest in? This can help determine your timelines and the amount of risk you’re willing to take with your investments. For instance, a capital campaign with a tight deadline might require a less risky investment while reserve funds can be maximized with longer, riskier investment options.
- What is the timeline for your investments? Typically, the longer investments remain in the market, the higher their potential return. If you plan on using the funds you invest within the same month—or even year—it might not be the best time to invest those funds. Your timeline can also help determine the amount of risk you should associate with investment portfolios.
- What is your ideal return on your investment? Have conversations internally to set realistic goals and projections about the ideal growth of your invested funds. Are you simply trying to simply match the inflation rate? Or would you like to raise money past this rate?
By discussing these questions with your team, you should have the foundation you need to be able to set goals for your investment portfolio. But don’t dive in too fast! You should also make sure to set internal policies for your team to follow as well.
Some of the internal policies you should set include:
- Statements about any industries you’d like to avoid in your investment portfolio
- The roles and responsibilities of your investment committee and other stakeholders
- Processes for how, when, and why you’ll add or remove funds from your investment account
- Descriptions about how and when you’ll report on your investments
Setting these policies will ensure your team is on the same page about your risk tolerance, your process for investing, and how to adhere to your mission during the process.
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2. Open a nonprofit investment account
After completing all of this preparation, your nonprofit organization can dive into the actual investment process. The next step in building your nonprofit investment strategy is to determine how you’ll invest your funds so you can be sure to choose the right type of investment account.
There are five typical types of investment solutions your organization can dive into. We recommend diving deeper into research about each one so you can determine the best option for your organization. These types of investment solutions include:
- Traditional big banks. These are the large names that people of all industries first think of when they picture investing their funds. While they tend to be the first thought, these banks typically have higher fees, tedious paperwork, and limited transparency. Not only that, but they cater to all industries and are less likely to understand the nuances of nonprofit investing.
- Wealth advisors. Active wealth advisors offer a personalized investment approach. However, the average wealth advisor’s fees come to about 1% of the assets they manage, which quickly becomes much more expensive than other options. Not to mention, advisors often underperform in the market.
- Do-it-yourself options. DIY investing allows your nonprofit to cut down on the cost of investing. However, it requires your volunteer board members to act as the sole fiduciaries. If your board members aren’t seasoned investors, they may struggle to maintain a consistent, lucrative approach.
- Money markets, savings, and deposit accounts. As we mentioned earlier in this article, money sitting in a savings account has an incredibly low return. The same can be said for money markets and deposit accounts. While they’re safe options, the return on these accounts rarely keeps up with the market.
- Automated investing. Automated investing is a modern investment approach that allows nonprofits access to diversified index investments. It provides simple, affordable, investment options that often outperform an actively managed investment portfolio for medium to long-term investments.
Once you’ve chosen the investment option that’s right for your nonprofit, you need to apply for your account and put in the starting funds. If you’re located in the USA, applying for an account often requires your nonprofit to provide your 501(c)(3) status, some general information about your organization and stakeholders, and a minimum funding balance. Once you’ve opened the account, you need to set up your diversified portfolios according to your risk tolerance and transfer funds.
3. Be open to alternative donation types
Your supporters feel the impact of inflation just as much as your nonprofit does. So giving money outright to your nonprofit might be a challenge. Non-cash donations are the first line of defense, allowing supporters to give in alternative ways and nonprofits to accept non-cash assets. However, there are more options that you can offer that allow supporters to give in the way most convenient for them.
By opening the right type of investment account, you may also open up the opportunity to accept stock and investment donations from your supporters. This helps you boost your fundraising revenue and earn more to fund your mission.
To do this, make sure your nonprofit can receive donations of:
- Stocks. When your supporters sell their stocks, they need to pay about 20% interest on their earnings. However, according to Infinite Giving’s guide to accepting stock donations, those supporters could take the entire amount as a tax deduction without paying taxes on the dividends if they donate the stock to an eligible nonprofit like yours.
- Cryptocurrency. Just like stock donations, gifts of cryptocurrency are also tax deductible and not subject to capital gains tax.
- Quasi and micro-endowments. Unlike traditional endowments, quasi-endowments are opened at the discretion of your board of directors using internal funds. Meanwhile, micro-endowments are much smaller options, making it a more accessible giving option for all of your donors.
Keep Tabs on Current Fundraising Trends
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Promote these unique types of giving opportunities to your supporters, encouraging them to give in ways that are most convenient for them. You might promote these opportunities via your various marketing campaigns using standard channels like email outreach, direct mail, social media, and even Microsoft or Google ad grant campaigns.
On these various platforms, explain in further detail the different options for alternative giving opportunities. Make sure it’s easy for supporters to understand and get started by explaining the process in detail. You might even decide to create an explanatory video guide to share on digital platforms so visual learners also find it easy to get started.
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4. Automate your investments
You and your team wear a lot of hats around the organization. That means you don’t have much time to worry about investing in the right stocks and ensuring these accounts are as productive as possible. That’s why our recommendation is to automate your investments.
Automated investing, also known as passive investing, often outperforms traditional investment strategies. Plus, it saves your organization a lot of time in managing your portfolio. When you start looking into investment options, consider automated investing accounts. Then, when you fund that account, you can choose your investment strategy and track the results!
If you’re unsure about your nonprofit investment strategy, consider looking for an investment management advisor to guide you. An investment manager can help you set the strategy most likely to help your nonprofit reach your goals and many automated investment platforms offer advisory services. Just be sure to look for an investment manager with experience working with nonprofits. Your goals will differ from typical for-profit clients, so this experience is essential.
You’ve heard the expression, “make your money work for you,” but we typically associate it with our personal finances. When it comes to your nonprofit, the same concept applies! You can make the most out of your reserve funds and even beat inflation by applying some investment best practices and building strong nonprofit investment strategies.