Setting Basic Financial Expectations
In order to make investing a regular part of your financial life you first have to figure out how much you can afford to invest a month. Understanding this gives you a clearer idea of what kind of investing you can do and your own and what club due levels are appropriate if you choose to join or form an investing club.
First, it's important to make a list of your regular monthly expenses and regular monthly sources of income. Round up to give yourself little leeway for variation from month to month. Now take a minute to look at where your money is spent. We've put together a worksheet that will do all the calculations for you:
Housing/Debt and General Living probably claim much of what you make every month. Try to remember that taxes are taken out of your income and adjust income flow accordingly.
In general, most people can safely afford to invest about 10%-15% of their remaining income (after all expenses are paid). So in other words, if after you've paid all your bills you have $200 left over, you can contribute to a investing club with a monthly due of $20. Again, our worksheet does all these calculations for you, giving you a conservation (10%) investment amount and a more aggressive (15%) investment amount. Keep in mind this is a monthly investment so while it may seem low, after several months it can add up to quite a little bit put away. If the investment amount really is disappointingly low, fiddle with your expenses and how much of your spending you would have to give up to get it to the level you prefer.
Starting Investing
Club -vs- Going it Alone
If you've never heard the term "investment club" before, you're probably wondering what that's about. Investment clubs and their role in the SHF mission are discussed at great length and detail during our workshops and in our videos, but we'll summarize quickly here anyway.
Investment clubs allow people to pool their money together in order to make investments as a group. They are useful for two reasons: one because they allow people to investment on small sums of money a month (generally in a $20-$50 range) and two because the group has to come to consensus about their investments first. In trying the sway the group for or against one investment, group members educate themselves about investing, learn how to research investments and evaluate them.
If you can only afford to invest $100 or less every month, an investment club is a great way to maximize your investing power and limited resources. If you can afford more you can go alone, but might still find it useful to participate in a club if you've never invested before. New investors tend to make decisions emotionally. They think like gamblers, not like investors, and therefore end up losing a lot of money instead of making it.
Starting a Club
There's a whole legal process to starting an investment club that you may be tempted to skip, but don't be naive the legal structures are there to protect you and your stake in the club's investments. If you skip the formal steps to starting a club, you risk find yourself in serious trouble later.
First thing you need is a partnership agreement that all members should sign and maintain a copy of for their records.
You'll also need to file a IRS Form SS-4 applying for an Employer Identification Number (EIN). Your club technically functions as a little investment company, so you'll need this for tax purposes.
Check with your county and state to see if you have to register your club. You may need to file a "Certificate of Conducting Business as Partners" form.
Lastly, you will need to open a brokerage and a checking account in your club's name to handle your assets. Many online brokerages available now have built in "virtual" accounts where they will pay you interest on your cash holdings with them. If this is the case, you don't need the checking account.
Record Keeping
With your club record keeping is essential, especially if your want to invest in Calvert Community Investing Notes which are purchased directly through Calvert and therefore will have to be tracked independently of any stocks/funds/etc in your brokerage account. You will also need to file tax returns reporting your earnings for your club and your members.
Thankfully there are many tools out there to make this a snap. Wikipedia has a great reference section outlining club accounting and linking to popular software.
If you want to do your club accounting by hand, or on an Excel spreadsheet, or would just like to understand the process better we recommend the following books:
Stay Tuned!
As SHF grows we hope to offer more and more products and services to make it even easier to get everything you need to start a club all right here. So keep an eye on us for more great resources!
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Offering Investments
Wait, I'm a nonprofit ... aren't I not allowed to take on investors?
Depends on the type of investment. Nonprofits are not allowed to redistribute income, which means that although they can sell stocks in some states, they are not allowed to pay dividends. However nonprofits are permitted to issue bonds, take out loans, and pay a return to investors through these programs. Nonprofits are also allowed to own for-profit companies and use their profits as a source of income.
What follows is a quick and dirty guide to the various options available to Nonprofit organizations to take advantage of in order to enter the world of Social Financing. Please note that regulation varies state by state and consult a lawyer and the SEC Compliance Division before issuing any investment.
Bonds/Notes
Bonds -vs- Notes: The distinction between Bonds and Notes is term: Bonds are over 10 years, Notes are under 10 years. The shorter term makes Notes are also more flexible and therefore not as regulated, but in essence they function the same way and are therefore grouped together here.
Advantages: As a debt investment their yields can be calculated easily and are much less risky for the investor than other products and therefore more attractive. The pool of industry professionals who facilitate bond programs is small but growing fast.
Disadvantages: First and foremost bonds are totally inappropriate for nonprofits with no revenue sources or especially volatile ones. Because bonds have set maturity dates if you're not able to pay them when they're due you default or forced to buy out bad bonds with more bonds. Also money raised through bonds may be restricted to certain purposes.
Examples:- Habitat for Humanity Notes
- The Trust for Cultural Resources of the City of New York Bonds
Who to Talk to:
Loans
Advantages: More flexible, the pay-over-time structure of a loan means a nonprofit can pay off more during times when revenues are high and cut back to the minimum in times of famine.
Disadvantages: Relies on banking infrastructure to facilitate and banks are often wary of nonprofit business plans for obvious reasons. As of right now there is no institution like the UK's Charity Bank to facilitate loans to nonprofits on a large scale. Selling loan based securities to individual investors is problematic and will probably become more so in light of the recent financial meltdown
Examples:- Self Help Nonprofit Loans
- Nonprofit Finance Fund Loans
Who to Talk to:
Funds
Advantages: Especially good for organizations that have no revenue streams and strong activist based programs. Funds are for-profit investment companies (mutual funds) that engage in SRI investing, take on investors and funnel the profits back into their parent nonprofits (after giving the investors their share of course). They serve a dual purpose of providing funding and allowing the organization to further its mission through shareholder activism.
Disadvantages: Are extremely expensive to set up and run, requires expertise or the ability to hire appropriate people, and like all for-profit businesses there's a chance the organization will lose money rather than raise it. In the past partnerships with other nonprofits to set up Funds has proven more viable than one organization going alone. Slight risk the IRS may change its mind about for-profit subsidiaries and kill/cripple the whole industry.
Examples:- Green Century Funds
- The Sierra Club Fund (now defunct)
Who to Talk to:
Certificate of Deposit Programs
Advantages: Run through a partner bank, takes the burden of administering the investments off the organization's shoulders.
Disadvantages: CD are not as glamorous as other investments and can be difficult to market. Also there are risks that investors will pull their money out early. Since a regular source of revenue is an absolute must, CD programs are most widely used by Fair Trade organizations.
Examples:- Equal Exchange CD program
- Veterans Family Fund CD
Who to Talk to:
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