Individual development accounts (the singular is often shortened to just "IDA") are special savings accounts set up for the benefit of people of modest means, ranging down to the very poor. This type of financial asset building program requires two things: a cooperating bank or credit union and a program sponsor, typically a non-profit agency or maybe a community development corporation.
Usually the program sponsor has received government or foundation grants and donations that allow it to match the savings that an individual deposits, although sometimes there is a limit as to the amount of the match. This reward is meant to inspire further savings and to help savings grow at a faster rate.
Typically programs require the participant to set up a particular goal or set of goals, for which the IDA may be used. Frequently these include saving for home ownership, saving for college, and starting a business.
A few permit a goal of buying an automobile, buying a computer, housing renovation, or something else concrete and specific.
Then the sponsor usually requires that withdrawals are used
for that purpose.
Many individual development accounts have a projected time span attached to them, ranging from several months to a few years. Exactly what happens at the end of that time, if the goal isn't met, varies from sponsor to sponsor.
Most programs offer budgeting and financial counseling classes and sometimes preparation for home ownership, legal assistance, or other projects aimed at helping people overcome barriers that prevent financial stability and growth, however slow it may be.
If you are reading this from outside the U.S., you may be encouraged to know that there's a movement afoot to take individual development accounts on a global scale. Read about the global assets project here. (Then our advice is don't wait; if you are affiliated with an appropriate organization, approach a financial institution or form one, and get started.)
When the idea of individual development accounts was advanced, some people scoffed at the idea that people who had never saved, or who had saved very little, could be inspired to do so.
However, U.S. research has suggested that the poor actually save at a higher rate than middle-class households, despite the fact that some people have started calling these programs microsavings.
Evaluations often show that 40-50 percent of those saving for homeownership accomplish their goal. To date the only research structured as an experiment showed that home ownership rate did not increase for a Tulsa experimental group that received individual development accounts, except in the case of the higher income households within the study.
These still would be poor people in the U.S., please understand, but the results do support the idea that many of us have been suspecting: perhaps home ownership isn't really the most appropriate goal for the lowest of the low-income households.
We suspect that the success of an agency's program depends in no small part on how effective their financial counseling services are. Good screening to make sure that the child (yes, some programs target older children saving for college) or household is ready for this step also is likely a critical factor.
As this idea born in academia began to proliferate, it really took off when the U.S. federal government became involved in providing some of the matching funds through the Assets for Independence program located within the Department of Health and Human Services. Most individual development account programs in the U.S. receive funding from this program.
The Office of Refugee Resettlement also funds some of the practitioners who serve immigrants and refugees. The latest farm bill also included a program for beginning farmers and ranchers.
Many state governments also have started funding program matches, as IDA success became ever more evident.
Community Development Block Grants, financial institution donations from individuals and congregations, general philanthropy, and sponsoring organization subsidy also are possible funding sources for the administration and match involved in individual development accounts.
When you are involved in community development work, obviously the implications of an organization setting up an IDA program in a particular area could be very important to neighborhood revitalization.
We know that community poverty is devastating to morale, soundness of the housing stock, and upkeep of the neighborhood. Building community wealth also can lead to increased likelihood that the market will be sufficient for retail establishments meeting everyday needs such as grocery stores, drug stores, or community-based "corner stores" that truly work hard at meeting community needs at reasonable prices.
As many of us can attest from personal experience, building financial assets tends to be an upward or a downward spiral.
Being able to escape from our typical
practices during the poverty years—buying everyday needs on credit,
paying to do laundry, buying small quantities, renting rotten housing,
payday loans, avoiding healthcare issues until we have to go to the
emergency room, or driving old cars that reward us with expensive repair
bills—is very helpful in being able to accumulate some personal
In the long run, individual development accounts for people without extreme debt and with a steady income, even if low, make a lot of sense. Whether they are worth the amount of governmental and philanthropic assistance being devoted to them remains to be seen.
They certainly aren't an all-purpose poverty solution. From a community standpoint, however, we think it's an idea worth trying if you can locate an interested financial partner and a well-managed non-profit sponsor. In the long run home ownership, entrepreneurship support, and higher education are pro-social goals, and enabling households that may have thought those goals out of reach to see differently is very rewarding.
Whether you are a curious because you're leading neighborhood associations, hoping to be a saver, or thinking about your organization as a prospective IDA practitioner, check the directory of organizations sponsoring individual development accounts to see what organizations offer programs near you. Although this idea has spread quickly over the course of about 20 years, there are still many gaps. Maybe you can help?
For the half of our readers from outside the U.S., if you are in a country with organized financial institutions and a poverty problem, think creatively about how this basic idea might be adapted to your particular situation.