Asset-Building Through Savings: Individual Development Accounts (IDAs)

Earlier this year CFED released its 2012 Asset & Opportunity Scorecard, which provides a comprehensive set of data on the financial security of U.S. households and highlights how the recession has affected the long-term financial security of Americans:

“27 percent of households – nearly double the percentage that are income poor – are living in “asset poverty.”  These families do not have the savings or other assets to cover basic expenses (equivalent to what could be purchased with a poverty level income) for three months if a layoff or other emergency leads to loss of income.  Since the release of the 2009-2010 Assets & Opportunity Scorecard, the number of asset poor families has increased by 21 percent from about one in five families to one in four families.”

Further, according to a 2010 nationwide study by the nonprofit organization EARN, 54% of American households across all income brackets do not feel that they would be able to meet their basic financial needs if their source of income was disrupted for three months or more; for low-income households (those earning less than $35,000) this figure rises to a staggering 61%.

These reports highlight what EARN describes as the “the significance between “income poverty” and “asset poverty,” or households having the financial reserves to get by on the federal poverty level for three months vs. living one paycheck, broken refrigerator, or medical emergency away from requiring public assistance.”

As these reports demonstrate, personal savings are an essential component of building financial security and avoiding the hardships of asset poverty.  However, savings not only afford low-income household the ability to weather financial emergencies, but are also the key to pursuing important economic opportunities like purchasing a home, pursuing higher education, or starting a business.  As such, the importance of creating opportunities for low-income households to build savings that can increase their financial security and access to greater economic opportunity cannot be overstated.

One such opportunity for helping low-income households to build savings is through the use of Individual Development Accounts (IDAs), a type of specialized savings account.  With an IDA, savers receive a corresponding match for every dollar that they save, which both rewards and incentivizes the individual to keep saving.  Additionally, IDA savers are required to complete financial training classes and use their IDA savings for a specific purpose, which typically include post-secondary education and/or job training, the purchase of a home, or starting a small business.

IDAs also offer an excellent opportunity for greater partnership and collaboration between nonprofit community development organizations, and banks and credit unions, which handle the IDA account transactions.  As such, the IDA serves as a vehicle for introducing low-income households (who are more likely to be underbanked and unbanked than other income groups) to mainstream financial services in a well-supported manner.

Studies on the effect of IDA programs have also demonstrated positive asset-building outcomes.  For example, one study of IDA programs participating in the Assets for Independence (AFI) program, a federal program that provides grant funding for IDA programs across the country, showed significant and positive effects on IDA program participants, including increased rates of homeownership, business ownership, and secondary education participation.

In recent years we have seen a number of our CDFI clients implement IDA programs with great success – participants are developing positive, life-long financial and savings habits as they reach their savings goals and are afforded an opportunity to move up the economic ladder as they use their savings to pursue higher education or become homeowners and small business owners.

If your organization has considered starting its own IDA program, EARN offers a list of 10 key considerations to establishing and running a successful program.

Does your organization currently have an IDA program or thought about starting one?  If your organization has an IDA program, what advice would you offer to others?