My understanding is that endowed funds are invested and only the earnings are used for charitable purposes. The principle sits there forever.
Isn’t that a major waste of resources that might otherwise be used? Am I missing something?
Wouldn’t it be better to gradually use the principle, say over 20 years? Or even 100 years if we’re talking about so much money that it can’t be used effectively for it’s intended purpose.
Well, I suppose that is one way of looking at it. I tend to disagree. There is something to be said for providing for a cause in perpetuity. That may be especially important to the person or institution that granted the money in the first place. Also, there is nothing that says all of the investment income has to be spent. The principle can grow to. A lot more money is going to be given to the charitable purpose over the long term if you don’t touch the principle. The math always works out in favor of providing money over time and not touching the principle. If the person that gave the money wanted to meet an expensive shorter term need then he or she could have done that in other ways.
For an example of a good, long-term use of charitable dollars, see the Noble Prize. What would it has gotten us if that money was burned through in 10 years. Also see trusts for maintaining historical sites. That is a long-term goal if I ever heard one.
Start with a minor nitpick: The money which sits and earns interest is the principal, not “principle.” Like the administrator of a school, it’s a noun usage of a word usually used as adjective. Likewise, although he was truly a noble man, Alfred Nobel spelled his name as noted here. Picayune complaint, but it’s the principle of the thing. 
Normally, the principal of charitable endowments works much as Shagnasty suggests, but is often invested in manners that, while getting a good return to ensure the endowment has working funds from the interest/earnings, also will advance the intent of the endowment. For example, money given to combat AIDS might be invested in a pharmaceutical company researching antivirals, the goals of earning income and advancing the research going hand in hand. The principal of an endowment whose goal is to support youth programs might be invested in profit-making enterprises that provide recreational activities for youth. These efforts are secondary to the earning of interest and dividends, of course, but good administrators will try to find such investments where possible.
re Post 2 - “A lot more money is going to be given to the charitable purpose over the long term if you don’t touch the principle. The math always works out in favor of providing money over time and not touching the principle.” … Mathematically the earnings would be greater but the total money given away is going to be less than if you slowly gave away the principal too.
re Post 3 - investing the principal in causes in line with the charitable purpose … that makes sense but I think that in actuality the funds are invested in safe investments and there are no causes that would match up anyway.
Read my last sentence (in post #3). I don’t mean to say that investment of principal is always a tool for advancing the intent of the endowment, just that it will be used when there is a profitable investment available that does advance that end. I’m well aware of endowments that don’t invest that way, and of some that do.
Aside from the other questions in your post, just wanted to clarify that there’s no “law” or anything that says a foundation has to leave the principal untouched. Many do; but it’s not required by law. Maybe the foundation’s by-laws state this will be the case but the by-laws can always be changed anytime.
I’m the treasurer of a non-profit trust and although we’d like to not touch the principal, and try not to, we are going to have to this year because we are in dire need of capital improvements. Since the previous Boards just ignored the disrepair of the building (for 100 years) because they were horrified at the idea of dipping into the principal, now the current Board is going to be forced to do it or risk a lawsuit if the roof should collapse. (Not to mention the possible injury or death of the animals inside the building.)
So, in short, yes, some foundations do use the principal. Mine has decided that we’d rather use the principal and protect the animals than to risk holding off on repairs just so we can “leave the principal untouched.” Cost vs. benefit and all.
It’s really no different from a regular for-profit business deciding that operating costs are going to be based on revenues rather than their funding or seed capital. That’s often how budget cuts come about even though the business actually has X dollars in the bank. They don’t want to risk draining their bank accounts and then really having a problem, so they based their budget on expected revenues. Loow revenues mean cuts, rather than just taking more money out of the base capital.
As Missbunny points out, there’s no law saying “Don’t touch the principal.” Many trusts, however, are the beneficiaries of bequests that mandate investment of the principal and expenditure of the interest/income. In that case, there’s a requirement by the terms of the bequest not to spend the principal.
By the way, as Shag implies, it’s not a case of “have a million dollars tied up as principal and spend a measly $25,000 from the interest” – intelligent money management can easily make 10% return on investment in most markets, which means that over a ten-year period, spending only the income, you’ve done the equivalent of spending the principal, yet still have the principal available to make more money for another decade, and so on in perpetuity.