These days, it’s not enough to simply have reserve funds. They should also be saved and invested in a range of places to maximize their value and usefulness.
Too often, nonprofits make the mistake of storing their entire reserve fund in a savings account, money market, or CD. Why is this a mistake?
Because reserves are usually held for long periods of time, inflation can dramatically impact the buying power of your savings—especially if they’re invested too conservatively and experience limited growth.
Consider the individual equivalent.
People often save for retirement not in a savings account, but in a 401(k). By taking this approach, they can simultaneously hedge against inflation and make market returns with compound interest, setting them up for long-term success. Investing nonprofit reserve funds works in much the same way.
Ultimately, banks are not meant for and do not incentivize storing long-term savings. Savings accounts and money markets average 0.06% returns each year. In 2022, inflation, on the other hand, grew above 9%.
Inflation can dramatically impact the buying power of your savings.
Let's do some quick math: $1M in a savings account with a current inflation rate of 9% means your organization could lose $90,000 of buying power this year alone. In a savings account, that money could lose up to a third of its value in just five years—right in time to buy that new HVAC system.
Thus, as a best practice, most nonprofits should plan to invest their reserve funds in the market in order to retain buying power over the long-term. When deciding how and where you’ll invest your reserve funds, consider asking the following questions of each provider:
- What are the associated service and investment fees?
- How will you access your funds? Do you need to go through a broker to invest and withdraw your funds?
- What types of security features does the provider offer?
- What investment portfolio options are available?
- How easy is it to work with the provider and use their investment platform and services?
Banks are not for storing long term savings.
Infinite Giving can help you create multiple reserve accounts that are conservatively invested and often bring higher average annual returns over long term holdings than savings, money markets, or CDs. Our asset management platform allows you to manage your reserves all in one place, easily create endowments, and receive noncash gifts. Moreover, you have complete access to your funds at any time and can easily transfer from your reserves to your checking account as needed.
Remember, bank's are not for storing long term savings. What may feel emotionally "safe" is often a strategic misstep that could cause loss of value on those hard earned funds.