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Stewardship – Capital Conservation

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Another way to be better stewards of our wealth is to give to charities that emphasize capital conservation.  This means giving to (or creating) charities that make payments from the interest and not from the principal.  For this article, I am going to use the simple example of giving $1,000 annual scholarship. 

Kevin Martin
Most Black organizations that I have been involved with do not practice or encourage capital conservation.  Instead, they rely on the "fundraiser".  This allows for entertainment (a big party) and for numerous people to get awards and get their picture in a "program".  The scholarship is almost secondary to the event.  Unfortunately, it seems that too many of these events raise too few funds.  For example an organization might have a "fundraising dinner" which brings in $10,000 dollars, but costs $9,000 for the venue, food, event program, entertainment, etc.  At the end of this dinner, a $1,000 scholarship is given.  How much money is available for a scholarship next year?  Zero, which means that we have to do the "fundraising dinner" all over again next year and each year after that.  Giving away the principal means that each year we have to start from zero.

Let's look at another way to fund this $1,000 scholarship.  The concept of capital conservation means that we will create a pool of funds (a principal amount) that will be invested to generate interest on an annual basis.  There are three steps for creating this pool of funds:

1. Determine the amount of principal required

2. Donate funds regularly until the pool is fully funded

3. Distribute the funds based on the interest, not the principal

1. Determine the amount of principal required

To simplify this example, assume that we need 10 dollars of principal for every dollar of giving.  To determine your principal, simply take the scholarship amount and multiply by 10.  If you want to give a 100 dollar scholarship, you multiply 100 x 10 = 1000.  For a $1000 scholarship, you therefore need a pool of $10,000

2. Give funds regularly until the pool (principal amount) is fully funded

Let's now assume that we want to give one scholarship worth $1,000 every year just like in the "fundraiser" example that I described at the beginning of the article.  We know that we need a minimum principal amount of $10,000.  How do we get that $10,000?  To fund this principal amount we will use "the health club" concept.  Most health clubs charge their members a small monthly fee.  We can do the same thing.  If we can get 100 people to give $10 per month, multiplying $10 x 100 = $1000.  At the end of 12 months we will have $12,000. 

3.  Distribute fund based on interest, not principal.  After we receive our $10,000 or $12,000, etc. we then invest this money.  If our investment returns 10%, we will be able to provide a $1,000 scholarship at the end of the year.  The important concept is that we do NOT touch our principal, so that after we have paid out our $1,000 scholarship from the interest, we still have the principal of $10,000 to invest again and generate more interest.  In other words, unlike the fund raiser example, we start every year with $10,000 not zero!

I can hear the naysayers already noting that we cannot guarantee a 10% investment.  This is very true.  We may need to have $15,000 or $20,000 in order to guarantee that we can provide a $1,000 scholarship.  However, please note that we still have our original donors paying $10 per month every month.  This means that we can easily have $24,000 in two years.

The basic concept still works.  Get enough money to invest and conserve principal by only paying out based on interest.  This is how the big boys do it by the way.  The Ford Foundation Scholarships, United Negro College Fund and many Fraternities and Sororities (on a chapter by chapter basis unfortunately) utilize this concept.  Utilizing capital conservation means that you don't have to be rich or famous.  This concept can easily be adopted by churches, civic and community organizations.  It is another powerful way for us to be good stewards of our wealth.

Kevin Martin grew up in Riverside and is interested in discussing specific actions for improving the Black community.  Comments can be sent to   by1989@pacificnet.net.   This account receives a great deal of spam so be sure to include this article's title or blackvoicenews in your subject line.

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