An endowment is a pool of money, made up mainly of donations, invested in a way that produces income to support the mission and work of a university or non-profit organization. Endowments grow over time with interest, dividends, and capital appreciation. Some of the earnings can be distributed during the year to help meet the organization's financial needs.

While an endowment can be an excellent way to secure permanent funds for the future, it's not always the best option for non-profits. Donors also need to carefully consider which endowment they choose and be fully aware of how it operates.

Endowments are designed as assets that can grow and provide steady funding over time. A university may start an endowment fund to better help serve students and staff by providing programs and ongoing resources. Most endowments exist in perpetuity which means the money is set up to last forever.

Donors can contribute funds to the endowment, which are then put into equities, bonds, and other investments. Most times, the principal balance remains in the endowment to preserve it. Then, each year a fixed portion of the endowment is paid as an annual distribution to fund important expenses for the organization.

"Oftentimes, donors can restrict their financial gift to dedicate it to a specific purpose, like a scholarship fund for example," says Emily Weisgrau, a fundraising communications consultant with more than 25 years of non-profit experience. "As a result, the institution is legally bound to both use it for the intended purpose and ensure that funds will be available for that purpose in perpetuity."

Read the full article about endowment funds by Choncé Maddox at Business Insider.