Introduction to Individual Development Accounts
IDAs Help Buy Homes, Fund College Education, and Build Businesses
Jan 8, 2009
Today, more than ever, a mortgage crisis, falling home values, and a bleak economy have made many workers wary about investing in their future.
Yet despite these troubling times, resources do exist to help workers become homeowners, create a college savings account, and provide their families with a better life. Currently, one such resource is the Individual Development Account (IDA).
What is an Individual Development Account?
Created in the late 1980s, an Individual Development Account is a special matched savings account developed for low income workers. Participants in Individual Development Account programs make regular deposits that are matched by funds from banks, grants, faith-based organizations and/or other public and private sources. The funds can then be used to help purchase an agreed-upon asset such as a home, college education, or small business.
Individual Development Account programs are generally created by partnerships between local nonprofit organizations (called IDA Program Sponsors) and a bank or credit union. IDA participants open accounts with these financial institutions, make regular deposits, and receive a monthly report informing them of how much money (in savings, match funds, and interest) is in their accounts.
To ensure participants develop good habits in working, saving, and investing, Individual Development Account match funds are only released after a predetermined savings goal has been met and the IDA Program Sponsor gives its approval. Participants usually also take financial education courses that help them learn about budgeting, establishing credit, applying for a home mortgage, buying a home, and maintaining homes. In many cases, financial counseling and other resources are made available to participants.
History of the Individual Development Account
The Individual Development Account was created in the late 1980s by Dr. Michael Sherraden, a professor of social work at Washington University in St. Louis. According to an article published on the Assets for Arizona Alliance website, Sherraden decided poverty could be fought by teaching people to save for and purchase assets such as a home or business and by helping them create college savings accounts to further their education. By getting workers started in asset building, Sherraden believed, the Individual Development Account could help workers gain self-sufficiency.
In the same article, Sherraden notes IDA programs also offer non-financial benefits, stating, “People saving for their future tend to take better care of what they have. They put more effort into maintaining their homes and neighborhoods, and they participate more in their community. They think more about their children’s future. They are more politically active.”
How to Participate in an IDA Program
According to the Corporation for Enterprise Development (CFED) website, there are over 500 IDA programs in the U.S. As a result, eligibility requirements and program details vary among different Individual Development Accounts. Workers should be aware of these differences before participating in a program by studying resources such as the CFED’s IDA Fact Sheet.
Certain IDA programs require that participants fall into a lower income bracket than other IDA programs. Some programs may also offer higher match ratios or a shorter period of time to reach a savings goal. And while most accounts are intended to help workers in buying a home, creating a college savings account, or starting a small business, some accounts help raise funds for more unique assets such as home improvement or a car.
Once workers are familiar with different Indvidual Development Accounts, they can explore an IDA directory, which lists many IDA programs in the U.S. From there, workers should contact their local IDA Program Sponsor to determine if the IDA program offered in their area is appropriate for their needs.
Further Reading:
Schreiner, Mark and Michael Sherraden. Can the Poor Save? Saving and Asset Building in Individual Development Accounts. NJ: Transaction Publishers, 2006. ISBN: 978-0-202-30836-4
Learn how to lower monthly home mortgage payments even more at An Introduction to the Community Land Trust.
