Why Your Nonprofit Needs a Spending Policy

A foundational tool for balancing today’s mission needs with long-term financial stewardship

What Is a Spending Policy?

A spending policy is a written framework that guides how much your nonprofit may withdraw from its invested funds each year to support operations or strategic initiatives. Whether you're managing a board-designated reserve, an endowment, or a short-term strategic pool, a spending policy ensures distributions are predictable, sustainable, and aligned with your mission.

Why Is a Spending Policy Important?

A clear, written spending policy helps your organization:

✅ Provide budget stability by smoothing the impact of market fluctuations
✅ Preserve long-term purchasing power of your investments
✅ Codify procedures and expectations, offering consistency amid staff, committee, or board turnover
✅ Strengthen transparency and accountability with internal and external stakeholders
✅ Promote disciplined financial decision-making across market cycles

Without a policy, spending decisions can become ad hoc, subjective, or overly reactive—undermining both financial health and donor confidence.

How It Fits with the Investment Policy Statement (IPS)

While your Investment Policy Statement (IPS) defines how funds are invested—covering asset allocation, risk tolerance, and performance guidelines—the spending policy defines how and when funds may be used. Together, they create a governance framework that supports your organization’s financial integrity.

Think of your IPS as the “how to grow it” guide and your spending policy as the “how to use it wisely” guide.

Applicability Across Investment Pools

This policy may apply differently depending on the type and purpose of the invested funds:

• Board-designated reserves may require greater spending flexibility
• Endowment funds typically prioritize long-term sustainability and donor intent 
• Strategic reserve pools may have defined short- or medium-term spending plans
  

The spending policy should reflect these distinctions while providing a common foundation for responsible fund use.

What Should a Spending Policy Include?

Key components often include:

🎯 Spending rate guidance (e.g., 3%–5% of a multi-year average balance)
📊 Method for calculating distributions (such as trailing 12 quarter-ends)
⚖️ Clarification on use of earnings vs. principal
🧾 Definition of qualified expenditures
👥 Roles and approval processes
🔁 Review timeline and amendment procedures

Final Thought

A well-structured spending policy does more than guide numbers—it builds continuity, confidence, and clarity. It’s an essential governance tool that ensures your investments are used in a way that aligns with your mission, no matter who is sitting at the table.