Why 25 may be better than 5

When I work with churches to set up or revise their endowment funds, I usually suggest a 5% spending policy:  take the value of the fund on September 30 each year and make 5% of that available for the following year, or some similar formula.

I think this is the best approach, except when it isn’t.

You may want to consider a 25% spending policy sometimes.

The 5% rule works because long-term you should expect to make a bit more than 5% on your endowment fund, so if the market is good and you make 8%, spend just five.  But in a bad year if it makes 3%, still spend five and know that it will all even out.

The good news is that this way the fund should last forever, as all good endowment funds should do.  The problem, of course, is that if you have $1,000, you only get $50 each year.  Spending 25% can be far more fruitful than spending a fifth of that.

Clearly this is best done with something other than a formal endowment fund.  If you have a fund that allows the principal to be used for new programs, or special priorities in the church, it can be  far more effective if it is used heavily, but for a shorter term.

I’ve always been hung up on the phrase “A ship in harbor is safe, but that is not what ships are built for.”  Too often we are more concerned with a fund lasting forever while the church around it is failing.

If you can spend a fund a bit more aggressively and have it positively impact the future of your congregation and its ability to reach the community as a mission outpost, then I say that money is well-spent.

And I always go back to the best marketing for your fund is for people to see it in use, let them understand its role in your ministry.  By showing that a special fund invests 25% of itself in Kingdom Work every can help foster donations from those who want to see that ship leave the harbor.

But a couple key points:

  • First, everyone needs to know that this is the rule.  Raising an endowment fund with the promise of it lasting forever, then spending it in just a few years violates the trust of those who contributed.  If you are going to start a fund for new ministries and plan to spend 25% each year this must be clearly communicated to those whom you are asking to support it.
  • Second, makes sure you’re not just spending it, but investing it.  By investing I don’t mean buying stocks and bonds I mean investing it in the future of your church.  Things like reaching out in mission, welcoming your community in, adjusting staffing or purchasing equipment to make you more effective missionaries are great examples.  But please don’t read this and use it as a reason to spend long term funds to pay the utilities in an effort to prop up your church for another year.
  • Third, expect results.  What do you think your ROI will be, your Return on Investment?  Too often we in the church spend money with no real hope that things will get better.  Sometimes this is not a surprise like not expecting the choir to sing twice as well if we replace their robes.

As always, if you want to talk such a program through, please let me know.

  1. Kristi Kinnison says:

    I especially like your key points. We are so eager to spend money, but we never go back and figure out if it was worth it. We rarely tell the stories of how the money was spent, and I have yet to meet a church leadership team that figured out how to measure Return on Investment BEFORE they spent some money.
    Keep up the good work, Brian!

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