How to Set Effective Drawdown Limits for EAs

Here are some key considerations for setting effective drawdown limits for effective altruism (EA) organizations:

  1. Align with Mission and Strategic Priorities: Your drawdown limits should be directly tied to your organization's mission, strategic plan, and long-term financial goals. Determine how much funding you need to sustain and scale your highest-impact programs.

  2. Maintain Appropriate Reserves: Ensure you have sufficient reserves to weather potential economic downturns, unexpected expenses, or fluctuations in funding. A good rule of thumb is to maintain 3-6 months' worth of operating expenses in reserve.

  3. Optimize for Long-Term Sustainability: Avoid drawing down too aggressively, as this can jeopardize your organization's long-term sustainability. Instead, aim for a drawdown rate that allows you to steadily grow your endowment or reinvest in future impact.

  4. Consider Spending Rule Frameworks: Many EA organizations use a "spending rule" to determine their annual drawdown, such as the 4% or 5% rule. These frameworks help balance short-term needs with long-term growth.

  5. Diversify Funding Sources: Reduce your reliance on drawdowns by diversifying your funding streams through activities like fundraising, earned income, grants, and partnerships. This can help stabilize your cash flow.

  6. Plan for Growth and Scaling: If your organization has ambitious plans for growth and scaling, factor those into your drawdown limits. Striking the right balance between investing in expansion and maintaining financial prudence is key.

  7. Regularly Review and Adjust: Monitor your drawdown rates, funding trends, and organizational needs on an ongoing basis. Be prepared to adjust your limits as circumstances change to ensure optimal alignment with your strategic objectives.

  8. Communicate Transparently: Share your drawdown limits and the rationale behind them with your board, staff, donors, and other stakeholders. This can help build trust and accountability around your financial stewardship.

Remember, the goal is to find the sweet spot between maximizing your current impact and safeguarding your organization's long-term sustainability. With careful planning and ongoing evaluation, you can set drawdown limits that allow you to do the most good possible.