Sometimes you have to think outside the box and know where to turn when you want help. There’s a well kept secret that can help low-income people -- Individual Development Accounts.
IDAs are matched savings accounts that help people with low incomes to save for a goal, such as a house or college education. For every dollar saved in an IDA, savers receive an additional dollar, sometimes more, depending on the guidelines of each program. But the good news doesn’t stop there. In addition to earning matching dollars, people who participate in the program learn about budgeting, saving and receive money management training.
Over the last decade, more than 85,000 IDAs have been opened in programs administered by more than 1,100 sites across the country. The impact of this initiative has resulted in more than 9,400 new homeowners, 7,200 educational purchases and 6,400 small business start up and expansion purchases, according to Kate Griffin, who directs the Savings & Financial Capability program at CFED, the Corporation for Enterprise Development, a non-profit organization that works to empower low and moderate-income families and communities build and preserve assets.
Here’s what you need to know.
How they work
IDAs are offered through partnerships between financial institutions such as banks and credit unions and local non-profit organizations, or program sponsors. The IDA program sponsor recruits people for the program, provides financial education classes and specific additional training based on the participant’s asset choice.
Once you sign up, you open a savings account with a partnering bank or credit union. The financial institution handles all transactions to and from the IDA, just as they do with other types of accounts. You’ll receive regular statements telling you how much you’ve saved and how much of a match you earned.
Programs can be six months or as long as several years, from beginning to end. You are allowed to withdraw money as soon as you reach the savings goal, but you must first get approval from your IDA program sponsor.
Depending on the program, you may have the option of saving your funds for one large goal like buying a home or making withdrawals for smaller, related goals, such as a computer, textbooks and college tuition, explains Griffin.
Requirements vary. But take for the example the United Way of Greater Philadelphia and Southern New Jersey’s Lubert Individual Development Account Program, supported by the federally funded Assets for Independence Program and Ira M. Lubert. People who want to participate in this program must be eligible for Temporary Assistance for Needy Families (TANF) at the time of application, or have an adjusted gross household income equal to or less than 200% of the federal poverty line, and have a household net worth of less than $10,000 (excluding the value of a primary dwelling unit and one motor vehicle), or be eligible for the federal Earned Income tax Credit.
You will need proof of income, like income tax returns, and must pay the minimum deposits, which can be as low as $10-$20 a month, depending on the program. Be prepared to attend financial education classes.
Why this is worth doing
"Because the funds are used in pursuit of a goal that the IDA program participant sets for him or herself, there is strong motivation to save and succeed in the program," says Griffin.
A study, Weathering the Storm: Have IDAs Helped Low-Income Homeowners Avoid Foreclosure, tracked 831 homebuyers in 17 states who purchased homes using IDAs between 1999 and 2007. Compared to other low-income homebuyers who purchases homes in the same communities and over the same time period, IDA homebuyers obtained significantly preferable mortgage loan terms, with only 1.5% having high-interest mortgage rates, compared to 20% of the broader sample; and they were two to three times less likely to lose their homes to foreclosure.
"The study suggests that participation in an IDA program with its related services and restrictions can improve homeownership outcomes for low-income households," says Griffin.
Consider the big picture
"An IDA is not the right program for every low-income person. Often, a person will need to ensure they have cleared up bad debts, have an adequate credit score, and have a consistent enough source of income to save towards their goal," says Griffin. Also, not every person has a savings goal that matches the goals of the program, she adds.
The first step to being successful in saving is having something that you care about saving for. "We do not recommend that someone join an IDA program until they feel ready to start thinking about the future," says Caitlin McShane, a spokesperson for the Opportunity Fund, a non-profit community development financial institution.
Sometimes too, points out Kevin Dow, senior vice president of impact and innovation at United Way of Greater Philadelphia and Southern New Jersey, "Unexpected life events can derail the timing and success of an IDA participant. Keeping them motivated to save for their education or their first home can often become a challenge."
It’s a good idea, he says, to start education and counseling as soon as a participant gets on the waiting list.
His organization has seen just how much IDAs can change lives. Since the program started in 2002, some 400 people have successfully saved funds and graduated from the program. They have saved more than $470,000, which has been matched by $1.4 million. More than 275 people saved for a post-secondary education and nearly 100 people purchased a new home.
Personal goal planning sessions help people chart a plan for setting and achieving educational and financial goals. "People have a pathway to become self-sufficient and financially stable," says Dow.
Learn more and find programs at Corporation for Enterprise Development's directory ; Assets for Independence Resource Center and Corporation for Enterprise Development.