Endowments are Underrated
It doesn’t take long for endowment earnings to exceed revenue from local taxes or school tuition. Long-term institutions like towns and universities should use endowments more.
ANNUAL IMPACT
When gains become meaningful
THE LONG VIEW
Building the endowment
Year by year
Every contribution, gain, and payout.
| Year | Base revenue | Saved | Gains | Payout | Endowment year end | Total revenue | Available after savings | Gains / revenue |
|---|
How the math works
Each year: base revenue rises with inflation when enabled; the opening endowment earns the annual return; any operating payout is deducted; that year’s savings are added at year end.
Operating mode: after N complete accumulation years, payouts begin in year N + 1. A payout is the selected percentage of positive investment gains, not a percentage of the entire endowment. Losses stay in the endowment and produce no payout.
Revenue: total revenue equals base revenue plus the payout. Available operating funds also subtract annual savings. Savings apply only to base revenue, so payouts are not saved a second time. Payouts do not change future base revenue.
Inflation: when enabled, base revenue in year t = starting revenue × (1 + inflation)t − 1. Turning inflation off uses a 0% rate, keeping base revenue and scheduled annual savings flat. The selected inflation rate is saved for when you turn it back on. Dollar amounts are shown in each year’s dollars; indexed percentages divide those amounts by starting annual revenue.
Percentage view: starting annual revenue is 100%. All balances, savings, gains, payouts, and operating funds are divided by starting annual revenue. With inflation enabled, base revenue rises: at 3%, it is 100% in year 1, 103% in year 2, and 106.09% in year 3. The headline returns-to-revenue ratio and the table’s final column compare gains with revenue in the same year. The starting endowment is entered as a percentage of starting annual revenue. Scaling both starting revenue and the endowment by the same factor leaves these curves and crossover years unchanged. Inflation still affects the pattern because revenue and the endowment can grow at different rates.
Comparison: the dashed balance reinvests every gain and continues saving each year. With operating mode off, it matches the selected scenario.
Source: inspired by the Endowment Math spreadsheet, using its 10% savings, 7% return, and 3% inflation defaults. This calculator counts the first year’s contribution and places all contributions at year end; the original sheet skips the initial contribution and adds later contributions before returns, so results differ slightly. The $1 million revenue is an illustrative scale.
A constant-rate illustration. Market volatility, fees, taxes, gifts, and spending restrictions are not modeled. Gains exceeding revenue does not mean that the full gain is available to spend.