How do you want to change the world? No matter the cause you care about, being an effective donor means supporting the nonprofits that have the potential to achieve the most good.

However, giving wisely can be tricky. Most of us make decisions using the information we have: a good friend’s recommendation, a convincing website, a well-planned fundraiser.

The market is dominated by a small number of nonprofits with large marketing budgets. Roughly 5% of charities in the United States spend more than 86% of all charitable dollars each year. This concentration often leaves out smaller, potentially more innovative charities, and makes it difficult to evaluate real impact.

This holiday season, take the steps to make sure your money is having as much impact as it could.

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How to Maximize Social Returns

The first step in identifying the most effective nonprofits is to ignore rough proxies for impact, such as “overhead ratios.” An overhead ratio is the portion spent on management and general operating expenses compared to intervention expenses. Contrary to what you might think, low overhead ratios don’t necessarily indicate effectiveness, because quality management teams may require high overhead for research or to launch new programs.  

As a simple example, say you want to reduce New York City poverty by funding an after-school program. Program A has an overhead ratio of 10%. Program B has an overhead ratio of 20%. Which actually does the most good per dollar donated? What you really want to know is, per dollar, how many kids are taught and supported in a high quality way? Understanding the impact of your dollar—students taught, lives saved—requires more nuanced research than high-level metrics.

Figuring out impact, however, gets complicated fast. The 30 largest foundations spend $3 billion on research and administration of grants, according to research and analysis done by Agora for Good, a platform that allows donors to build and manage virtual foundations with the support of expert guidance.

As in investing, specific knowledge is key to appropriately evaluating a nonprofit’s performance. Platforms like Agora for Good help donors navigate this process by providing recommendations on highly effective nonprofits through partnerships with industry experts in each sector—health, education, and environmental protection. Want to address clean water, for example? Find vetted organizations that bring clean water to those in need for just $1 a year.

Agora’s mission is that each dollar donated by an individual—from you, your friends in finance, your grandma—is as high impact as a dollar donated by the most well-informed, wealthy philanthropist. You can donate wisely through three simple steps.

1. Develop your giving strategy.

Giving, like investing, works best when you proactively develop a strategy based on your vision and goals. Try not to only be reactive to requests for contributions; instead, start by envisioning your ideal world and the causes that would help us get there.

With Betterment’s charitable giving service, having a strategy helps you take advantage of giving appreciated shares, which can help you earn certain tax advantages. Even if you just plan to give cash, developing a giving strategy can help you maximize your impact.

2. Optimize your donation amount for taxes.

With a strategy in place, you can align your giving with your own potential tax advantages. Most charitable gifts can be deducted on your tax return if you itemize your deductions. Currently, individuals in the United States give just about 3% of their adjusted gross income (AGI).

If you give appreciated shares with Betterment’s charitable giving tool, you will also avoid capital gains taxes on those shares.

If you strategize well, you can effectively help free up more money when you give from decreasing your tax liability, which in turn helps you give more later.

 

3. Build your giving portfolio.

Think of your donations as you would the money you use to invest. This means using a portfolio approach that lets you select the types of interventions you want to fund, and build a basket of investments. Platforms like Agora for Good can help by creating a single portal to manage, contribute, track your gifts.

Here’s the truth: If you are a smart investor, you can—and should—be a smart donor. And with Betterment’s solution for giving shares, you can make your donations as tax-optimized as possible. Learn more about Betterment’s charitable giving tool here. And before you make your next donation, check out these tools for helping you explore charities that make an impact.