Charity: It ain’t what you give, it’s the way you give it

Millions of us are passionate about supporting charities, as the philanthropy tax' furore demonstrates. Yet few of us know what charities actually do with our money, how to find a good one, or how best to support them. Here are three things to do before giving money.

1. Choose wisely

Some charities are miles better than others. This sounds rather heretical, because many people think that all charities are good. But charity is much the same as education and healthcare: some teachers are better than others; some doctors and some treatments are more effective than the alternatives. It's the same with charities.

In Kenya, for example, where diarrhoea from dirty water is a major problem, delivering chlorine to households can solve the problem. However, putting chlorine into the village water source achieves the same result for less than half the cost.

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Similarly, in north India, free village clinics are pretty good at getting children immunised. But if clinics offer mothers free lentils for every child immunised, immunisation rates increase more than six times.

In southern India where I was once a teacher children often skip school. Giving the parents cash if their children show up (a respectable and widely used practice, called a conditional cash transfer') can resolve this problem. But giving out free school uniforms instead is ten times as effective.

2. Do the maths - or cheat

Choosing wisely is easier said than done, however, because charities rarely provide the information you need to make an informed choice. So ignore the fund-raising, promotional literature and look under the bonnet. Investigate what the charity actually does and whether it's any good at it.

As this can be a laborious process, the smart money imitates. Independent analysts, of which GiveWell is probably the best, are a good place to start. Givewell is so particular that it only recommends about 1% of the charities it assesses, and it publishes its research in great detail. There are also online supermarkets' of vetted charities, such as Global Giving for international development organisations, and LocalGiving.com for small British organisations.

Many charitable trusts and foundations also analyse charities to decide which ones to fund. You should be pretty safe supporting charities that they back. So look at which big trusts already fund a charity you're considering: backing from the BBC's Children in Need or Comic Relief, for example, is a good sign.

3. Look at administration costs

People often think that low administration costs are a good sign. They're not. Money spent on administration isn't wasted. It's needed to monitor work, evaluate results and make improvements. As a result, charities with higher administration costs tend to be better than those with lower ones. So, once you've found a charity you want to support, what's the best way to give? I've looked at options depending on how much you have to donate.

I don't have any money to give

Then rustle some up from thin air! Here are three ideas.

Friends

Starfish, for example, is a charity that helps HIV/Aids orphans in South Africa, and is supported by young professionals in Britain. They host dinner parties in their homes and get guests to donate to Starfish the money that they would have spent if the party had been held in a restaurant.

Neighbours

To take one example: art dealer Frederick Mulder was in a dispute with his neighbours in London over access to land that he owns. Rather than hire expensive lawyers, Mulder offered to give his neighbours perpetual access if they each (himself included) donated £25,000 to an educational charity in Zambia. This generated over £100,000 and improved neighbourly relations into the bargain.

Clients

Mulder took his idea and ran with it. Now, when negotiations with clients over a piece of his work get stuck, he suggests that the difference between his price and the offering price be donated to charity.

Websites

Some search engines, such as Everyclick or GoodSearch, make a donation for every search made. For shoppers, various portals make donations for every purchase. For instance, Easyfundraising.org.uk and TheGivingMachine.co.uk generate donations for purchases from retailers including John Lewis, Apple, Dell and travel website LateRooms.

Employers

You could encourage your employers to consider charities when they buy in bulk. A charity could be the beneficiary of a company's volume discounts.

I have £500 a month, or a £20,000 lump sum

If you have this kind of money to give, the first thing to do, as we suggested above, is to choose good organisations. Also, don't spread yourself too thin choose just a few charities to support, rather than giving small sums to many. This reduces the amount that gets lost in bank charges and credit-card fees, most of which are independent of the size of the donation. Focusing on a few charities also reduces the amount of analysis you need to do, which will improve your decisions.

Avoid the temptation to attach strings to your gift, regardless of its size. Donors sometimes restrict how a charity can use their money, stipulating that it must be used, say, in Vietnam; or within the next year; or to buy minibuses. Almost invariably, this reduces the donation's effectiveness. It presents the charity with an administrative nightmare and, worse, prevents them from responding to changing situations.

Imagine an aid agency operating in Malaysia, Indonesia and Thailand, and that each country's operation is funded by separate restricted gifts. Suppose that the Malaysia programme doesn't spend its whole budget, but that a hurricane damages Indonesia.

Clearly, the charity should spend some of the savings from Malaysia in Indonesia. But restrictions could prevent this. It would have to contact each donor and negotiate wasting time and effort that, in extreme cases, might result in lives being lost unnecessarily. In fact, charities say that unrestricted donations are worth just over half as much again as restricted ones. So, by avoiding stipulations, you are effectively giving 50% extra for free.

I have £50,000 a month or a £1m lump sum

If you have this sort of money to give to charity, then we should talk! This is because, at these levels just as with investing the difference between a mediocre performance and stellar performance is enormously magnified.

A strategy of making lots of small donations to many causes without understanding any of them properly is known by professional charitable foundations as spray and pray', and is about as reliable as it sounds. The best donors have a specific goal. The Wellcome Trust, Britain's largest charity, focuses solely on "extraordinary improvements in human and animal health".

The Gates Foundation, the world's largest charity, focuses on just three issues: global health, international development, and education in America. To take a corporate example, UBS's grant-making Optimus Foundation works solely for needy children in particular regions.

Choosing your goal is rather like choosing where to operate commercially: you want to find where and how your resources are most valuable (much like comparative advantage). You should also take account of your interests, experiences and non-financial resources, such as team mates or family and so on.

And don't think of what you are doing as giving to charity'. Rather, you should think of money (and anything else) as resources you can marshal to achieve your goal. For some goals, giving money to charities is indeed a great move. But for others, there are better tools, such as partnering with businesses or government departments.

For example, the Gates Foundation aims to eradicate malaria. Clearly, charities don't generally develop, test and market pharmaceuticals. So the Gates Foundation has, in effect, hired drug giant GlaxoSmithKline, and subsidised its research and development on malaria drugs.

The Alfred P Sloan Foundation's aims include improving the public understanding of science. To this end it supports theatrical plays about scientists, engineers and mathematicians, and paid for the New York staging of Michael Frayn's play Copenhagen, which is about physicists Niels Bohr and Werner Heisenberg meeting during World War II to discuss the atomic bomb.

Also, share what you're doing and learning. Charities work on challenging problems: as Warren Buffett notes, these are issues that have already "resisted great intellects and often great money". So we need all the information we can get about who's doing what, what's working and what isn't, and we need donors to be honest about their failures. Gather and publish useful insights in terms of making a difference, it ain't just what you give, it's also the way that you give it.

Caroline Fiennes advises people and companies on how to give well. She is director of Giving Evidence, a company that specialises in "advice on giving, based on evidence". She has recently published a book on the subject: It Ain't What You Give, It's The Way That You Give It: Making Charitable Donations That Get Results. You can buy the book at the discounted price of £12.99 (plus £2.80 postage) at Giving-evidence.com/book2/ .