Individual development accounts (IDAs) enable low-income working families to enter the financial mainstream, save for an asset, and build wealth. IDAs supplement the savings of low-income households with matching funds that typically come from various private and public sources. These matched-savings accounts are typically restricted to one of three uses: purchasing a first home, pursuing post-secondary education, or starting or expanding a small business. Some programs permit uses like making home repairs, purchasing a car, or making a deposit on rental housing.

IDAs are generally managed through programs run by community-based organizations in partnership with financial institutions. Individual and matching deposits are never mingled; all matching dollars are kept in a separate, parallel account. When the IDA account holder has accumulated enough savings and matching funds to purchase the asset (usually over two to four years) and has completed a financial education course, the institution holding or managing the account makes payments from the IDA directly to the asset provider to complete the asset purchase.
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Extensive research on IDAs has demonstrated that the accounts are important tools for making families more financially secure. The American Dream Demonstration (ADD), which ran from 1997 through 2003, was the first systematic study of IDAs. It proved that, with the proper incentives and support, the poor can and do save. The average monthly net deposit per participant was $19, and—with an average match rate of two dollars for every one dollar saved—each participant accumulated about $700 a year.

Today more than 73,000 low-income families and individuals have opened IDAs through programs in more than 540 community-based organizations across the nation. According to the most recent data available (from 2006), at least $552 million has been invested in IDA asset purchases since 1999, including more than $223 million in federal and state appropriations, $65 million in participant personal savings, and $104 million in nonfederal matching funds.The results are more than 8,400 new homeowners, more than 6,000 educational purchases, and more than 5,200 small business uses. Often, community development financial institutions (CDFIs) run IDA programs, manage the accounts for the savers, and finance the purchases.

This is an excerpt from The NEXT American Opportunity. The full text can be downloaded as an Adobe PDF Document.