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Individual Development
Accounts offer
matching grants to help savers reach goals
By Michelle
Samaad • Bankrate.com
 Priscilla
Tanner, 36, knew that owning a house one day would mean making a
lot of sacrifices and hanging on to her 1984 Ford Escort for just
a little longer.
A helping hand came by way of the Community
Action Project of Tulsa County in Tulsa, Okla. The agency sponsors
an Individual Development Account program that is helping her save
money to buy her first home.
"I didn't think I could stick with a routine
of saving money every two weeks," Tanner says, but it hasn't been
as hard as she had thought. "I keep my goal of having a home one
day in sight, and it motivates me to keep saving."
In an Individual Development Account program,
money saved by an eligible individual is supplemented with money
added by banks or organizations. The account is designed to help
people save money for specific reasons such as buying a house, attending
college, starting a business or saving for retirement. The money
is flagged so it can't be withdrawn on a whim.
About 25 states already have some version of
an Individual Development Account up-and-running. Usually, nonprofit
agencies have linked up with local banks and credit unions to offer
the program.
The
magic of matching dollars
The way the plan generally works is that a person, partnering
with an agency and financial institution involved in the program,
will set up a savings account. The community agency will match each
dollar that the participant deposits into the account. Banks or
other organizations usually provide the match dollars. The size
of the match varies with each agency.
Under the Tulsa program, people receive a $2
match for every $1 saved to buy or repair a first home, and $1 for
every $1 saved to start or expand a small business, pay for education
or retirement, says Steven Dow, executive director of the project.
Local money for the program comes from the Bank
of Oklahoma, a Community Development Block Grant from the city of
Tulsa and the Zarrow Foundation.
Since the Tulsa program launched last year,
175 participants have signed on, accumulating more than $48,000
in savings. Like Tanner, many participants are saving for the down
payment on their first home, Dow says.
To be eligible for the program, an individual
must be working and must meet certain income guidelines. For example,
a single person's 1997 household income should not have exceeded
$11,835 or, for a family of four, $24,075.
Participants in the Tulsa program can save anywhere
from $10 to $62.50 a month and deposit it into an account set up
at the Bank of Oklahoma.
"(To some), the savings may seem like small
potatoes, but the program is not a get-rich-quick scheme," Dow says.
"It calls for steady, deliberate savings toward a modest yet important
goal."
In
the beginning
The concept of the individual development account is not new.
A community organization called the Corporation
for Enterprise Development in Washington launched the development
account program in 1997 in 12 states. So far, participants have
saved about $500,000, including the matched money.
"Who can deny that America will not be better
off with more homeowners, more small businesses, and a better educated
and skilled work force," says Ray Boshara, program director of the
nonprofit group.
Boshara adds that the organization's research
found that the individual development accounts provide a return
on investment of $5.60 for every $1 spent in the form of new businesses,
additional earnings, more investments and reduced welfare spending.
"Owning assets gives people a stake in the future
-- a reason to save, to dream, to invest time, effort and resources
in creating a future for themselves and their children," says Washington
University Professor Michael Sherraden, author of Assets and
the Poor. Sherraden also introduced the concept of individual
development accounts in his book.
He says that while the top 10 percent of Americans
command 40 percent of national income, the top 1 percent control
90 percent of assets. This means that "one-third of American households
have (either) no -- or negative -- investable assets; a sad state
of affairs." Sherraden explains.
Major
help from major banks
Some major players in the banking industry are currently aiding
community groups in establishing the accounts. Last year, Citibank
awarded $50,000 grants to four California nonprofit community organizations
to be used in establishing the accounts for mostly job training
and small business development ventures.
Likewise, accounts are set up at National
City Bank branches in Lexington, Ky., for participants working
with the Community Ventures Corp., an economic development agency.
"It certainly offers hope to poor people living
from paycheck to paycheck," says Jean Ann Fox, director of consumer
protection for the Consumer
Federation of America, a consumer-rights group based in Washington.
"Saving today often offers hope to those who can't see the light
at the end of the tunnel."
Another agency hopes to find banks to match
money that participants would put into an individual development
account.
The OIKOS Community Development Corp. in Dayton,
Ohio wants to raise enough money to bring 30 people into its saving
program by the end of June, says executive director Rita Bowen.
While banks and local businesses contributed
$45,000 to the program, Bowen says OIKOS still needs to raise additional
money to match the money savers deposit into the account as well
as administrative costs. So far, the program is able to match $4
for every dollar each participant saves.
Saving
for that down payment
Still, the goal remains intact: "We want to be able to help
those who have the discipline and make the effort to put money away
for things that will enhance their livelihood," Bowen says.
Like the program in Oklahoma, Bowen says many
of the participants are aiming for the down payment on a new house.
"These accounts certainly help establish good savings habits and
put the financially strapped on the road to independence," she says.
If Sen. Joseph Lieberman, D-Conn., has his way,
the savings tool would become a nationwide program with more money
to be had.
He proposed an individual development account
plan in February 2000 that would give up to $300 to an individual,
provided that the individual puts the money in the bank and takes
a class about saving money.
The way the plan works is when someone puts
money into an account, the bank would match the deposit. It can
only be used toward the purchase of a first house, college education,
job training or starting a new business. The money would be tax-free
until withdrawal.
Since the bank would maintain the account, the
participant could not make any withdrawals until a certain dollar
amount has been reached. Under Lieberman's plan, people could put
up to $2,000 a year in the account, and banks could match up to
$300 per year.
"While millions are tapped into the bull market,
there are millions more who are tapped out, with no assets or savings
to speak of," says Dan Gerstein, press secretary for Lieberman.
To qualify, participants must be over 18 with
a household income of not more than 60 percent of an area's median
income and a household net worth of less than $10,000, excluding
any home equity and the value of one car.
The bill has been referred to the Senate Finance
Committee.
Personal
Finance 101
Before withdrawing the matching money, individuals must complete
a free economic literacy course that teaches them how to clean up
their credit, set up a budgeting and savings schedule, and money
management basics. Banks and community groups would provide the
course, with the government reimbursing some of the costs to administer
it.
The estimated cost of the program to the federal
government would be up to $500 million a year. Congress is expected
to vote on the proposal by mid-summer.
Meanwhile, Tanner has her eye on a three-bedroom
house with a big backyard for the vegetable garden she plans to
plant.
"Having a house for my children is probably
the best gift I can give them," she says. "It's not a dream anymore
-- I can really see it happening."
-- Posted: June 15, 1999
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