Straight Story: The Buffett effect

TEXT OF INTERVIEW:

TESS VIGELAND: It's time once again for our economics editor Chris Farrell to help you sort out what's smart, what's stupid and what is the Straight Story. And this time Chris joins a collective sigh of awe.

CHRIS FARRELL: You got it. I mean how else to react to Warren Buffett's pledge of more than $30 billion to the Gates Foundation.

VIGELAND: Whew.

FARRELL: Think of it. The world's two wealthiest men are combining their fortunes for charity. And I say get used to it. Thanks to all the wealth created in recent decades, foundations are exploding in number and size. So what does this mean for you and me? Should we give less because the richest of the rich are giving more? Absolutely not. But we can learn. We can learn from the Buffetts and the Gateses of the world how to be smarter in our charitable giving. Here's the straight story: The best charities have tough standards for how they spend their money. And when choosing a charity so should you. The goal of giving is not just to feel good about ourselves. The goal is to make a difference.

VIGELAND: Well making a difference means that you hope you kind of know where your money is going. And when you talk about tough performance standards at a charity, how do you know whether or not your money is being put to the use that it should be and not to things like overhead and huge staffing and that sort of thing?

FARRELL: There's a couple of routes that you can take. The classic route is there are these services that rate the various charities and you can go to giving.org or there's charitywatch.org. If you are a Warren Buffett wannabe, a value investor in the nonprofit world, you can go to guidestar.org which gives a lot of information about the financials of a nonprofit. But one of the things I take away from the Gates Foundation that I really like is their self-criticism. So for example the Gates Foundation has, as one of its priorities, improving high school education in the United States, particularly the 30 percent of drop outs that we have. So the Gates Foundation spent a lot of money creating or transforming bigger high schools into smaller high schools. It didn't make that much of a difference. They hired outside experts to judge what their performance has been. Outside experts are pretty critical. Now the Gates Foundation didn't run away. It's actually deepening its commitment, but it's taking that knowledge and just like a good businessperson it's adjusting its investments and it's publishing the information. So to me that's the real key.

VIGELAND: You talked a lot about some of the things that the Gates Foundation does in education. They also work a lot in other countries on public health programs, vaccinations. Should people be piggybacking on those efforts? Or should they put their money where charities don't have $60 billion to work with?

FARRELL: Yes.

VIGELAND: Yes to which one?

FARRELL: I think you should do both. I think you can do both. What's fascinating about what Buffett has done is he's bringing the concept -- and we're going to be hearing about this for the next several years -- he's bringing the concept of leverage to the foundation world. So rather than go out and take on all the expense and the time and the learning curve of setting up your own foundation -- and remember he could have had the biggest foundation in the world, he could have had a rivalry with Bill Gates -- but what he said is 'why am I going to do this? I'm a value investor. This guy's really smart. And his wife is really smart and they know what they're doing. And they've already done the learning and they have the infrastructure. So I'm going to give my money to them and leverage on their knowledge and expertise.' And I think many individuals, even though we're only giving a few dollars, can do the exact same thing. So what I see happening is more leveraging going on but at the same time a recognition that in my local community, I am going to be giving more money into areas that are being neglected by these mega foundations. It's not really neglected it's just it's not on their list of strategic priorities.

VIGELAND: So then what's the best way to spread your money around as kind of an average charitable giver?

FARRELL: You know I think people come up with different ways but I still like the idea of concentration. Concentrate your money, your volunteer time and your expertise so that you can really make a difference. And there's just so many aspects of our life. If you spread yourself too thin, you waste a lot of energy, you waste a lot of time and sad to say, you waste a lot of money.

VIGELAND: Our man Chris Farrell with the Straight Story. Chris thanks for all your charitable advice.

FARRELL: You're welcome Tess. It's fun as always.

About the author

Chris Farrell is the economics editor of Marketplace Money.

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