- We have developed a methodology to estimate how much money any U.S. charity is losing every year by keeping money in low-interest accounts
- This methodology is easy for anyone to replicate and is based on publicly available nonprofit financial statements (IRS Form 990) that all U.S. charities are required to file yearly
- We approximate GiveWell’s five-year opportunity cost at $4 million dollars, and other EA charities have six-figure or seven-figure five-year opportunity costs as well
- Like most U.S. charities, many EA charities across various cause areas do not follow the best practice of storing cash in high-interest accounts (which have the same level of risk as low-interest accounts)
- It only takes several hours of staff time for organizations to set up a high-interest account to move money into (similarly quick to opening up a personal savings account online)
- High-interest accounts are considered a best practice at major companies like Apple, Google, and Facebook, as well as at large EA charities like the Against Malaria Foundation
- See our comprehensive EA Forum post in 2019 for more information on selecting low-interest and high-interest bank accounts and investment options
- Actions an EA community member can take:
- Contribute online by posting on our action thread: scroll to our action thread in the comments section
- Advise one or more EA organizations you have a close connection with
- We’ve been able to help all of the charities our staff have previously worked at to make these improvements, but we’ve noticed that the less connected we are with an organization, the harder it is to get in touch with their staff
- We hope that readers can help us make the case for better cash management practices to a wide range of EA charities—by doing so, any given reader might be able to "contribute" up to millions of counterfactual dollars to these organizations
- Take action by directly advising an EA organization you are closely connected with, or by filling out our outreach request form
- This article was published by Antigravity Investments, an EA social enterprise with the mission of leveraging finance to drive millions of dollars to high-impact charities
- Our intention here is to simply encourage institutional behavior change and engage in discussion on cash management practices; this recommendation can be implemented independently of our involvement
- The ideas expressed in this article are also available as a 10-minute EAGxVirtual Unconference talk
The majority of charities, including EA charities, do not optimize their interest on cash. In this section, we will introduce our cash interest opportunity cost estimation methodology for U.S. 501(c)(3) charities and use GiveWell’s Form 990 as an example.
The U.S. tax collection agency known as the Internal Revenue Service (IRS) requires that all tax-exempt organizations, including charities, fill out a financial report known as Form 990 every calendar or fiscal year. The IRS mandates that all Form 990 reports be made publicly available.
The Form 990 report for any nonprofit can be found with a quick Google search. GiveWell’s historical Form 990 reports, and other financial information, can be found on its official records page. The IRS’s official instructions for Form 990, the primary source for our analysis methodology, can be found here. We consulted with the IRS and an independent CPA to get their input on various facets of our methodology.
Here is a link to GiveWell’s 2019 Form 990 report (the most recent Form 990 available at publication) which we will use as an example: https://files.givewell.org/files/ClearFund/Clear_Fund_2019_tax_return_Form_990.pdf
The balance sheet of any organization describes what it owns as well as what it owes to others. The Balance Sheet (Part X) on every Form 990 contains two key bits of information we will use.
Line 1 of the Balance Sheet titled “Cash—non-interest-bearing” describes how much money a nonprofit keeps in accounts that pay zero interest.
Line 2 of the Balance Sheet titled “Savings and temporary cash investments” describes how much money a nonprofit keeps in accounts that pay any amount higher than zero interest.
GiveWell’s Balance Sheet (GiveWell is legally known as The Clear Fund) indicates that it held $6,419,058 in zero-interest accounts and $34,682,097 in non-zero-interest accounts at the end of 2019, for a total of $41,101,155 in cash.
The Statement of Revenue (Part VIII) on Form 990, which is similar to an income statement, breaks down the sources of income a nonprofit earned during the year.
Line 3 of the Statement of Revenue titled “Investment income (including dividends, interest, and other similar amounts)” describes how much interest a nonprofit earned throughout the year from its cash and investments. Interest on a nonprofit’s investments, which is separate from a nonprofit’s cash holdings, can greatly inflate the amount reported on Line 3 above the interest a nonprofit earns solely on its cash. Therefore, Line 3 represents a maximum bound for how much interest a nonprofit earned on its cash during the year.
GiveWell’s total cash and investment income in 2019 was $26,260. GiveWell held investments in 2019, so using the full amount on Line 3 to estimate GiveWell’s interest on cash in 2019 likely overestimates GiveWell’s actual interest earned on cash in 2019.
Dividing $26,260 by GiveWell’s end of year cash balance in 2019—the $41,101,155 we calculated in the previous section—produces an upper bound interest rate of 0.0006389, or 0.064%.
Multiplying GiveWell’s $41,101,155 in cash at the end of 2018 by a 2.16% rate of interest yields a total of $887,785 in potential interest earnings which is nearly 34 times higher than the actual investment income GiveWell earned.
Subtracting the $26,260 upper bound on how much GiveWell actually earned on its cash in 2019 results in an annualized opportunity cost of $861,525.
Calculating Opportunity Cost
A more precise estimate of GiveWell’s opportunity cost involves making several adjustments, including switching to calendar years rather than using the more recent end-of-year cash balance.
GiveWell earns interest on its average cash balance during the year, rather than its cash balance at one point in time like the end of the year. We can better approximate this figure by averaging GiveWell’s beginning of year and end of year zero-interest and non-zero-interest cash and then summing them. This produces an estimated average cash balance in 2019 of $33,441,682.
Although high-interest checking accounts exist, we can ignore 30 days of GiveWell’s spending when calculating opportunity costs, because organizations may keep a few weeks of typical spending in their checking account which typically pays no interest. JP Morgan calculates that the average small business keeps 27 days of typical spending distributed across checking and savings accounts. Transfers between accounts only take several business days, so recommendations for companies to have a cash buffer usually don’t distinguish between keeping the buffer in a checking account or in savings accounts, as long as the company has a buffer. GiveWell may want to keep 30 days of expenses in its zero-interest checking account to cover day-to-day transactions and keep the rest in savings. Ideally, GiveWell should transfer money from checking to savings and vice versa as needed to maintain a 30-day buffer in its checking account.
Line 25 of the Statement of Functional Expenses (Part IX) titled “Total functional expenses” is the sum of a nonprofit’s total annual spending.
We can divide GiveWell’s $40,896,067 in 2019 spending by 12 to get a 30-day cash buffer of $3,408,005. By subtracting the $3,408,005 cash buffer from GiveWell’s $33,441,682 estimated average cash balance in 2019, we can calculate a reasonable amount of money GiveWell should be storing in a savings account. We get a reasonable savings balance of $30,033,677. It appears like GiveWell is already following the best practice of not keeping too much money in zero-interest accounts.
Thus, GiveWell’s estimated interest rate in 2019 is the $26,260 upper bound interest income divided by the $30,033,677 reasonable savings balance to get 0.0008743, or 0.087%.
Multiplying the $30,033,677 reasonable savings balance by a 2.16% federal funds rate of interest yields a total of $648,727 in potential interest earnings. Subtracting the $26,260 upper bound on how much GiveWell actually earned on its cash in 2019 results in a calendar year opportunity cost of $622,467.
As a reminder, investment income represents an upper bound on a nonprofit’s annual cash holdings because it also includes earnings from a nonprofit’s investments. Some charities derive significant investment income while keeping large amounts of cash in zero-interest accounts. To account for this rare scenario, a nonprofit’s zero-interest cash balance can be multiplied by the market rate of interest during the nonprofit’s tax period to get its zero-interest cash opportunity cost. Multiplying GiveWell’s $5,505,570 estimated average zero-interest cash balance by 2.16% yields $118,920.
The higher of the reasonable savings balance and zero-interest opportunity cost calculations—$622,467 rather than $118,920 in GiveWell’s case—should be used to estimate a nonprofit’s annual opportunity cost since both numbers are lower bound estimates.
The 2.16% U.S. federal funds rate in 2019 is one of the most conservative interest rates possible. Higher interest rates would result in significantly higher annual opportunity costs. Our top recommendation for an ultra-short-term bond ETF (JPST) in our recommendation article published in early 2019 earned 3.34% in 2019, according to Portfolio Visualizer. There were no drops in account value on a monthly basis (0% maximum drawdown). Multiplying GiveWell’s $30,033,677 reasonable savings balance by 3.34% generates an opportunity cost of over one million dollars per year, at $1,003,124.
Using an even higher interest rate of 5.51%, which is what a very conservative portfolio of 20% stocks and 80% bonds earned on average (CAGR) from January 2000 to December 2019 calculated using Portfolio Visualizer, the one-year opportunity cost on GiveWell’s 2019 reasonable savings balance would be $1.65 million dollars a year. The 5.51% figure is an approximation of GiveWell’s expected opportunity cost rather than what it would have experienced, which would have been a small loss of -1.15% in 2018 followed by a 13.01% gain in 2019. For those curious about how this portfolio would have fared during COVID-19, the maximum negative month-over-month change in account value was -3.20% since the beginning of 2020; the portfolio is now up 9.11% for the YTD period ending November 30, 2020.
Estimation Methodology Caveats
The average of a nonprofit’s start of year and end of year cash could noticeably underestimate or overestimate a nonprofit’s actual average cash balance during the year because it only uses two days as data points rather than all 365 days in a year which is not available from the Form 990 data. If the estimated cash is lower than the actual cash, the actual rate of interest is lower than the estimated rate. Additionally, the total cash a nonprofit can earn interest on is higher than the estimated amount of cash which can considerably increase the opportunity cost. Overstating daily cash has the opposite effect, meaning the actual rate of interest is higher and the opportunity cost is lower.
Investment income in Form 990 represents the absolute upper bound interest income a nonprofit earned from its cash holdings during any given year. This enables us to be relatively certain a nonprofit is not using its cash holdings well if it has low investment income relative to its reasonable savings balance. Unfortunately, most charities likely do not optimize their cash holdings, but this cannot be determined from the reported Form 990 investment income because that figure also includes income they earn from investments. This means that our methodology is good for identifying some poor performers, but cannot reliably be used to estimate high performers when it comes to cash holdings. If a nonprofit has positive values for Lines 5, 6, 7, 11, 12, or 13 on the Balance Sheet (Part X), that indicates other factors are contributing to investment income besides a nonprofit’s cash holdings (Lines 1 and 2).
Estimating Counterfactual Impact
GiveWell has Form 990 data going back more nearly 14 years. In those 14 years, it did not attempt to improve the yield on its cash. Since we have no way of knowing when GiveWell would otherwise optimize the yield on its cash, we could use the Copernican Principle and assume we are at the midpoint of when GiveWell would optimize its cash. Multiplying GiveWell’s $622,467 estimated 2019 opportunity cost by 14 years yields an estimated impact of $8,714,538. Given the number of charities that have not optimized their cash yields, this doesn’t seem like an unreasonable approach.
GiveWell’s specific finances inspire another approach. GiveWell started 2015 with $8,179,232 in cash, 2016 with $12,177,201 in cash, 2017 with $13,184,319 in cash, 2018 with $19,598,155 in cash, 2019 with $25,782,209, and 2020 with $41,101,155. Using least squares regression, GiveWell’s five-year cash growth rate is 35.83%. It is likely that organizations with more cash—and thus more potential opportunity costs—will seek to optimize their yield sooner rather than later, decreasing the number of years of counterfactual impact. However, GiveWell’s cash growth also means that its opportunity costs rise rapidly over time, increasing the opportunity cost every year.
Assuming we’ve encountered GiveWell three-fourths through the timeline when GiveWell would otherwise have started looking into how to increase its yield on cash, we are at year 14 out of 19. Using a five-year time period, a $30,033,677 reasonable savings balance, a 35.83% growth rate on GiveWell’s reasonable savings balance, and a recommendation that increases GiveWell’s interest on its reasonable savings balance by 1% compared to what it would have earned otherwise, the counterfactual impact of advising GiveWell is an additional $4,126,003 towards GiveWell and the top charities that GiveWell regrants to.
Regardless of the estimation method, it’s very likely the counterfactual impact of changing GiveWell’s financial practices is in the millions of dollars. Not bad for a time investment that should take between 1–10 hours of staff time to set up, and 0–2 hours of staff time to administer on an annual basis! In general, the two time requirements are (1) filling out a one-time application to open a higher-interest account and (2) making online transfers between accounts on an ongoing basis, perhaps once a month. These time requirements are around the same order of magnitude it takes to create a new personal savings account (perhaps three hours for an organization instead of one hour personally) and move money between personal bank accounts (perhaps three minutes for an organization instead of one minute personally). An optional one-time requirement, and perhaps the most time consuming, is staff evaluation and deliberation time around whether and how to implement this change within an organization. We typically speak with the person in charge of finances at a charity, whether that’s the executive director, head of operations, or CFO, who is more financially experienced and can make the decision without escalating the request. Answering the common questions of (1) why some accounts pay higher interest than others, (2) why high-interest accounts have the same risk as low-interest accounts, and (3) how to implement a solution usually only takes several minutes per question.
In general, the counterfactual impact of successfully making a case for better cash management at any organization is likely at least several times higher than the annual opportunity cost, given that organizations would likely incur at least several more years of suboptimal cash interest before implementing better cash management.
Actions for the EA Community
Here are the results of applying this same methodology for a few EA organizations:
Average Cash Reserves
Estimated Interest Rate
Interest Rate for Fiscal Year
1 Year Opportunity Cost
|The END Fund|
|Helen Keller International|
|Centre For Effective Altruism|
|Good Food Institute|
We have spoken to dozens of charities, and the only implementation objection voiced to us so far is a lack of staff time. GiveWell mentioned in our last formal communication with them in February 2019 that “GiveWell has historically not engaged in that kind of active money management because we [do] not have the operational bandwidth to do so.”
Given the magnitude of the opportunity costs involved—equivalent in 2019 to hiring 13 full-time research analysts or deworming 600,000 people a year and growing in GiveWell’s case—and the ease of implementing a solution, we believe all charities should implement better cash management if the opportunity cost exceeds the several hundred dollars in staff time (<10 hours) it should take to implement. Furthermore, volunteers across the EA community and within our team are willing to help organizations implement a solution at no cost.
We’ve noticed that the less connected we are with an organization, the harder it is to get in touch with their staff and build trust. We hope that readers can build upon our work by helping us make the case for better cash management practices to a wide range of EA charities—by doing so, any given reader might be able to "contribute" up to millions of counterfactual dollars to these organizations. You can take action by commenting on our action thread in the comments section, directly advising an EA organization you are closely connected with, or by filling out our outreach request form if you work at a charity or are closely connected to one.
We founded Antigravity Investments because we realize people and charities can be unfamiliar with common ways to increase their income using investing. Charities face implementation barriers such as certain banking and investment accounts being difficult to open and a lack of staff experience with finance and investing. We’ve developed various solutions to overcome these issues. We make it extremely easy for charities to open high-interest cash accounts with reputable providers like StoneCastle, and help charities get started with optimizing their cash holdings at every level of desired risk and returns. To learn more or request free advising, email firstname.lastname@example.org
Thanks to Benjamin Pence, Caroline Jeanmaire, and Aaron Gertler for their assistance in reviewing this article. Reviewers do not necessarily endorse the views expressed in this article.