What is Endowment

Definition: A fund that is made up of gifts and bequests that are subject to a requirement that the principal be maintained intact and invested to create a source of income for an organization. Donors may set up an endowment to fund a specific interest; and a nonprofit's governing body may set up an endowment. In any case, an endowment requires that the principal remain intact in perpetuity, or for a defined period of time or until sufficient assets have been accumulated to achieve a designated purpose.

What Is an Endowment?
An endowment is a fund that is restricted. Only the interest from the fund can be spent, not the principal that anchors the endowment. Usually, only a portion of the interest or earnings from the endowment (typically 5%) are spent on an annual basis in order to assure that the original funds will grow over time. Professional money managers often oversee endowment funds, investing the money in stocks, bonds, and other instruments.
What Are the Advantages to an Endowment?
Stability is the main reason to have an endowment. Small and new nonprofits often only think about the current fiscal year or the next payroll. It is important to get out of that financial trap as soon as possible. An endowment helps diversify your organization's income and reduces your dependency.

That you have an endowment can be enormously comforting for donors too...the idea that you plan to be around for a long time. You can also offer donors the option of providing a gift that will keep on giving well into the future, and/or the opportunity to fund the needs of the moment such as operating and program funding.
What Are the Disadvantages of an Endowment?
You might be criticized for having an endowment or for having too large of an endowment. Some well-known universities have come under attack recently for growing huge endowments while claiming not to have funds for other uses.

Small nonprofits are sometimes criticized for not spending every dime on current needs. Even funders such as foundations might slight an organization that already has money. That is unfortunate since it only encourages financially shaky management, but you should take these biases into consideration as you think about setting up an endowment.