The giving paradox: Challenges during a downturn

Experts in philanthropy have long discussed a problem in the way most people give: When the economy is doing well, we tend to give more. When the economy struggles, we tend to give less. Of course, this makes sense: We give to charity when our own needs are taken care of and pull back when we are less certain.

But for nonprofits facing the grim reality of an economic downturn, higher levels of need and fewer donations can create a double whammy—not to mention that federal and local government support may also dry up during these hard times.

In an economic downturn, charities can face a double whammy.

In other words, our pattern of giving is out of sync with the pattern of need. Can anything be done to alter such a fundamental aspect of our philanthropy? A new study indicates that donor-advised funds, like those sponsored by Vanguard Charitable, may help address this problem.

How donor-advised funds can help

Grants from a donor-advised fund (DAF) are independent of the contributions into the account. As a result, DAF owners can contribute to their account when the economy is strong and recommend grants if the economy turns. Evidence suggests this is what happens:

“While other forms of charitable giving generally drop during economic downturns,” say H. Daniel Heist and Danielle Vance-McMullen, authors of Understanding Donor-Advised Funds: How Grants Flow During Recessions, “we find that grants from DAFs remain relatively stable in recession conditions.”

“Given these findings, donor-advised funds may be an important resource to the nonprofit economy in future recessions.”

Long-term planning with added flexibility

Donor-advised funds help donors take a long view of their charitable giving. But as Heist and Vance-McMullen show, DAFs also provide flexibility. Donors to DAFs can respond nimbly to current events. If the economy enters a recession, a DAF owner is in a great position to recommend grants. The funds have already been earmarked for charity and can be sent out quickly.

"Donor-advised funds may be an important resource to the nonprofit economy in future recessions," a new study concludes.

In the same way, when natural disasters strike, DAF owners can spring into action. With their DAFs, they don’t have to plan or worry about where the funds will come from. (At Vanguard Charitable, we further expedite this process by offering a special disaster relief option on our online grant recommendation form. This facilitates the rapid disbursal of funds to help provide immediate aid.)

According to Heist and Vance-McMullen, in both 2008 and 2009, the height of the Great Recession, DAFs nationwide granted out more than 7 billion. This was more than DAFs had granted out in 2007 before the recession began. And in 2009, the average DAF account granted out more than it took in.

The economy is unpredictable. Giving doesn’t have to be

Donors with a Vanguard Charitable donor-advised fund can provide important stability to the nonprofit sector and help beloved charities ride out downturns. A DAF allows our donors to pursue their long-term charitable visions while preserving their ability to help out at a moment’s notice.