(MONEY Magazine) – For Michael and Martha Hogan, giving to charity is not just a tradition—it's a passion. The St. Louis couple, both 51, donate regularly to some two dozen nonprofits, ranging from major groups like the United Way and the National Kidney Foundation to the lesser-known Small World Adoption Foundation, which helped them adopt the youngest of their four children. "The charities that get most of our time and money are the ones we're familiar with and where we see the most need," says Michael, an executive at a scientific-research company. But, he adds, "I'm a total sucker when someone asks me for a small amount."

Case in point: Last year Hogan was approached in a Wal-Mart parking lot by a man selling raffle tickets to support a program to teach inner-city kids to play golf. "It was a steaming-hot day, and he looked like a regular guy with a job and other things to do," says Hogan. "But he was out there stumping for his cause." The man asked for a $5 donation. Hogan gave him $100, even though he'd never heard of the charity before. "I just wanted to help him out," says Hogan. "It's not really rational—it's just something that touches your heart."

As that Wal-Mart moment shows, when it comes to charitable giving, we often let our hearts rule our heads. As a result, we frequently wind up having second thoughts about our giving: Did that donation really end up where it's needed most? Will this charity really use my money wisely? A survey conducted earlier this year by the Brookings Institution confirms the public's doubts: Nearly one out of three respondents expressed little or no confidence in charitable groups, and only 11% said they believe that charities do a very good job of spending their money wisely.

Fact is, people have good reason to be wary. In recent years several high-profile scandals have rocked the charitable world. Most recently, the American Red Cross was taken sharply to task over its plans (later dropped) to use some Sept. 11 funds for other purposes, while the Nature Conservancy was criticized for failing to disclose loans to its executives. High salaries awarded to the heads of some nonprofits have also drawn fire, as compensation for the chief executives of the nation's biggest charities grew at a rate nearly double that of inflation last year. The IRS is beefing up scrutiny of compensation practices among tax-exempt organizations, and the Senate Finance Committee held hearings on charity accountability last summer. But at this time at least, no new legislation seems likely.

Despite the cloud cast by recent events, Americans continue to give generously. Last year charitable donations rose 2.8% to $241 billion, which represents 2.2% of disposable personal income, according to Giving USA, an annual philanthropy report from the American Association of Fundraising Counsel. That's consistent with the historical rate of individual giving, which for the past 40 years has hovered between 1.8% and 2.6% of disposable personal income.

The question, then, is not whether to give, but how to make sure the dollars you do give really count. These four steps will help ensure that your donations go to the causes that matter most to you and that will use your money wisely.

Most people give to charity for a very simple reason: They are asked. More than 60% of households that donate money have received a request on behalf of the cause, according to Independent Sector, a coalition of philanthropic organizations. Donors who respond to solicitations also give more than self-motivated givers—75% more, or $1,945 vs. $1,114, in 2001, the latest contribution figures available.

That approach is certainly understandable. Choosing from among the roughly 1 million charities in the U.S.—nearly twice the number of a decade ago—is a daunting task. And at this time of year it may seem as if you're getting appeals from every one of them. Adding to the volume: Many telemarketers who have been barred by the "do not call" list from phoning you on behalf of private companies have begun soliciting for nonprofits, which are not barred by the list. Under this deluge, giving when we are asked is often the simplest solution.

But taking the easy route is not the most satisfying way to give—and it's certainly not the way to ensure your money is doing the most good. That's why charity experts urge donors to take the lead, rather than follow directions, in determining where, when and why to give. Ask yourself a few questions: Which issues are most important to you? Do you feel strongly about famine relief, say, or cancer research? Do you prefer to donate within your community or send your money to national or international groups that will direct your contribution where it is most needed? The closer the match between your giving and your passions, the greater the reward you will feel.

Often a personal connection to the cause can be the most powerful motivator. That's certainly the case for husband and wife Mark Mandel, 46, and Sarah, 50, of Schaumburg, Ill. The cause closest to their heart is finding a cure for Tourette's syndrome, a neurological disease that may lead to uncontrollable tics and vocalizations. Mark, who co-owns a pharmacy, found out that he had TS at age 38, 18 months after two of his three children were diagnosed. "We realized there was very little funding for this disease," says Mark. In addition to contributing his own money, Mark organizes an annual race in his town to support TS charities. The latest run drew 1,000 participants and netted nearly $12,000. Says Mark: "The race is good for our community, good for TS, and we feel good too."

Once you've identified the causes that matter most to you, find the specific charities that best fit your giving goals. Going online is a quick way to sift through the hordes. You can search for charities by cause at websites like Guidestar.org and Networkforgood.org. If you prefer to give close to home, you can get information about local charities from community foundations, which are nonprofit organizations that support area causes. You can find one near you at communityfoundations.net.

With a few names in mind, you'll then want to get a handle on how wisely these charities spend money to support their mission. You don't want to give to a group that squanders donations on administrative or fund-raising expenses. In a 2003 survey of charity telemarketing campaigns, New York State attorney general Eliot Spitzer found that on average less than a third of the money raised went to the groups—the rest was siphoned off by telemarketing and campaign costs.

That comes as no surprise to Ruth Robbins, 65, a retired scheduling analyst in Pataskala, Ohio, and her husband Alan Hewett, 55, a computer programmer and chemist. Says Ruth: "We never respond to telephone contacts, and we're really annoyed by phone calls from charities we already support." The couple, who donate 15% of their income to charity, prefer to research groups to support on their own, often via the Internet. "We like to know where our money is going," Robbins says. "It's a big help to see the information online."

You can scrutinize the financial details (including tax returns) for nearly 300,000 charities at guidestar.org. Or you can rely on watchdog groups to do the analysis for you. Sites like Charitywatch.org and Charitynavigator.org rate charities on how well they use the money they raise. Give.org, the philanthropic arm of the Better Business Bureau, looks at finances as well as governance issues, such as whether the charity has independent directors on its board.

Each of these watchdog groups has different criteria, but as a rough guideline, a charity earns the highest rating if at least 60% of the money it spends goes to its programs and no more than 35% to fund raising or other administrative costs. Many top charities do better, devoting 80% or more of the money they spend to their cause. But the financials don't tell you how well a charity is performing its mission—say, the number of people a homeless shelter has served or how many studies a cancer research group has funded.

Also bear in mind that there are sometimes good reasons for a charity's numbers to fall below these standards. Start-ups, for example, may have to spend more on fund raising in order to build name recognition, while groups that depend on loads of small contributions may have higher marketing costs than those funded by a few big donors.

Still, if a charity's numbers seem troubling and you have no easy way to check the situation further, move on. There are many other worthy causes; no doubt you'll find one of them.

Although you wouldn't necessarily know it by the urgent tone of many fund-raising appeals, not all charities are in dire straits. The Salvation Army, for example, announced in January that Joan Kroc, widow of the founder of McDonald's, had bequeathed a whopping $1.5 billion to the nonprofit, or more than it raised from all private contributors last year. National Public Radio received $200 million from Kroc, more than twice the group's operating budget. Meanwhile, Harvard University recently reported that its endowment had grown to $22.6 billion, about twice as large as runner-up Yale's.

One way to gauge the relative neediness of a nonprofit is to compare its net assets—its assets minus liabilities—with its annual expenses. You can find these figures in its annual report or online. Says Daniel Borochoff, president of the American Institute of Philanthropy, which runs Charitywatch.org: "If you see that a charity has enough assets to cover several years of expenses and has no immediate plans to spend it on, say, a new building or program, chances are, it doesn't need your money as urgently as other organizations."

Also consider directing some of your giving to smaller organizations and less popular causes that don't have the money for big fund-raising appeals. They include groups that provide humanitarian relief to poor and war-torn nations, and human-services groups that operate food banks, job training programs and similar initiatives for the needy here at home. (For more on where the giving goes, see the chart on page 132.)

You may also get a better feel for the impact of your contribution if you direct at least some of your giving to organizations within your own community. That's the approach used by Allen and Shira Purkiss, who made giving locally a priority when they moved to Ridgefield, Conn. last year. Among their new charities: the Ridgefield library, which their two daughters often visit, concerts in the park and a residence for mentally handicapped young adults. Notes Allen, 43, an investment adviser: "When we give to our town, we really get to see where the money is going and how it's being used."

The more control you can exercise over your donation, the more satisfying your giving is likely to feel too. For example, Kelly Chapman, 37, a singer and executive recruiter in Cleveland Heights, Ohio, recently started a scholarship fund at a community foundation to honor her mother, who suffers from mental illness yet still managed to hold down a job and raise her children. Working with the Cleveland Foundation, a local nonprofit that supports area charities, Chapman set up a scholarship for college students with mental illness, funded by a $10,000 donation that was invested in a mutual fund. Chapman and her mother awarded the first $750 grant in September. "My goal is to grow this fund to $100,000," says Chapman.

Giving, say, $100 to a worthy cause is good. Turning that hundred bucks into a $150 or $200 donation without contributing more from your own pocket is even better.

One of the easiest ways to leverage a charitable gift is to get your employer to match it. Some 8,600 companies offer a matching grant program, often kicking in a dollar or more for every dollar their employees donate. Check with your human-resources department to see if your workplace offers this benefit or might institute such a program.

Another way to get a bigger bang for your charitable buck is to invest in a donor-advised fund, an increasingly popular way of giving. New accounts in these funds—sponsored by Fidelity, Vanguard, T. Rowe Price and other fund groups, as well as many community foundations—rose by 9% last year, bringing total assets to $11.3 billion. With a donor-advised fund, you contribute a set amount of money (usually at least $10,000) to a fund that invests in stocks and bonds, just like in an ordinary mutual fund. You get an up-front tax deduction for the amount you invest in the year in which you make your contribution. At your direction, a portion of that money will then be donated to charities of your choice, while the rest can continue to grow—presumably giving you a larger total amount to contribute to charity over time. While you're not legally required to donate a set amount to nonprofit causes every year, most sponsors set their own guidelines to make sure that fund holders continue to give actively.

Don't forget to claim your rightful tax deductions for other charitable giving too. This, of course, is leveraging of a different sort: Every $100 that you donate if you're in the 30% tax bracket, for example, will in effect cost you only $70. When you make a donation, keep a record such as a bank statement or a credit-card receipt, and be sure to get a written receipt from the charity for gifts of $250 or more. You can also claim a deduction for any tangible goods, such as clothes or furniture, that you donate. If you give an item worth more than $500, you will need to file an additional form with your tax return, detailing the donations.

Remember, claiming your deduction is not simply a matter of trimming taxes, but a strategy that allows you to give even more. And giving generously and wisely, after all, should be the goal.

LAST YEAR AMERICANS DONATED $241 BILLION TO CHARITY. Nearly half of that money went to schools and religious groups, while causes such as the environment and international relief received far less.

CHARITABLE CONTRIBUTIONS IN 2003 (by type of nonprofit)

SOURCE: Giving USA Foundation.