An Endowment Fund is a fund that is restricted. Only the interest from the fund can be spent, not the principal that anchors the endowment.
Usually, only a portion of the interest or earning from the endowment is spent on an annual basis to assure that the original funds will grow over time.
What are the advantages to an Endowment?
Stability is the main reason to have an endowment. Small and new nonprofits often only think about the current fiscal year or the next payroll. It is important to get out of that financial trap as soon as possible. An endowment helps diversify your organization’s income and reduces your dependency.
That you have an endowment can be enormously comforting for donors as well. You can also offer donors the option of providing a gift that will keep on giving well into the future, and the opportunity to fund the needs of the moment such as operating and program funding.