Every Wednesday, we publish our “Investor Toolkit” series on TSI Network. Whether you’re a beginning or experienced investor, these weekly updates are designed to give you specific investing advice. Each Investor Toolkit update gives you a fundamental piece of investment advice, and shows you how you can put it into practice right away.

Today’s tip: “If you consider charitable donations an investment in a good cause, be prepared to look into them as carefully as you would your investments to ensure that your money is going to the right place.”

You’ll often hear that investors spend more time choosing the options on a new car than they do picking investments. That’s undoubtedly true of some. But the funny thing is that many people spend even less time deciding where they’ll make charitable donations, and hardly anybody notices.

Some people find it distasteful to inquire into the goodwill or efficiency of any organization that is legally qualified to solicit donations and issue charitable receipts. However, this is precisely why you should look closely before handing over a donation.

Look beyond concepts when making charitable donations

There are limited funds available in the world for charitable purposes. The cause or people you intend to help with your gift are in no position to demand an accounting or take their business elsewhere. The more that goes to waste, the less is available for the object of your donation. But the quality of charities varies as widely as the quality of stocks you can buy for your portfolio.

Unfortunately, all too many charitable donors pick charities the way beginning investors pick stocks. They get seduced by an appealing concept, based on snap judgments of a photo or sound bite, or the recommendation of a friend or acquaintance. However, if you follow our advice and do a little digging, you can go a long way toward making your donation work harder toward bringing about the goal that attracted you in the first place.

A simple way to obtain financial information on charities

You can get free annual reports from charities, just as you can from public companies. In addition, the Canada Revenue Agency compiles information about charities in a free database that you find at the following web address:

http://www.cra-arc.gc.ca/chrts-gvng/lstngs/menu-eng.html

For example, the site lets you see how much money the charity pays its 10 highest-paid employees, in nine salary ranges: under $40,000, $40,000 to $79,999, $80,000 to $119,999, $120,000 to $159,999 and so on to $350,000 and over. Of course, a larger charity or one that is involved in technical areas will need more high-priced help.

You should pay close attention to the portion of the charity’s revenue that goes to charitable purposes (as opposed to administration and fundraising). We like to see charitable spending make up a minimum 80% of the total. In contrast, lots of charities devote little more than half their budget to charitable purposes. At some surprisingly large and seemingly reputable charities, administration and fundraising expenses eat up 40% or more of donations.

Note that even highly regarded charities sometimes fudge the numbers. For instance, they may attribute some of their fundraising outlays to, say, “public education.”

Look elsewhere if you have doubts about the integrity of a charity’s (or a company’s) insiders

The charity business, like the stock promotion business, draws more than its share of unscrupulous promoters. That’s because both industries deal in intangibles.

In charities and in investments, one key rule always applies: there are no limits to the ways in which a dishonest operator can cheat. So if you have any doubts about the integrity of the insiders in a charity or in an investment, it’s best to look elsewhere.

Next week look for our updated and re-issued Special Report, Finding the Real Blue Chip Stocks: The Power and Security of Canada’s Best Dividend Stocks.