Imagine a really big, long-term savings account for a non-profit organization – like a university, a hospital, a museum, or a charity. That’s essentially endowments.
Endowments
Here’s the breakdown:
- A Gift That Keeps Giving: Someone (a donor, often a wealthy individual, family, or corporation) gives a large sum of money to a non-profit. But instead of the non-profit spending that money right away, they put it into an endowment fund.
- Invested for the Long Haul: This money is then carefully invested by professional money managers. The goal isn’t just to keep the money safe, but to make it grow over many, many years.
- Living Off the “Interest” (or Earnings): The key idea behind an endowment is that the original gift amount (the “principal”) is generally never spent. Instead, the non-profit only uses a small portion of the investment earnings generated by that principal each year.
- Why It’s So Important: This creates a stable, ongoing source of income for the organization, year after year, forever (or for a very long time). It helps the non-profit plan for the future, fund scholarships, pay professors, maintain buildings, support research. Or do whatever else is part of its mission, without constantly having to raise money for basic operations.
- “Restricted” vs. “Unrestricted”: Sometimes a donor might specify exactly how the earnings from their gift should be used (e.g., “for scholarships in the arts department”). This is a “restricted endowment.” Other times, the non-profit can use the earnings for whatever it needs most, which is an “unrestricted endowment.”
In the simplest terms, an endowment is a fund of money donated to a non-profit, where the main amount is invested and never spent, but the earnings from those investments are used year after year to support the organization’s mission.
It’s like planting a money tree that keeps bearing fruit without ever needing to cut it down.
