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Programs Teach Savings to Ease Poverty

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Programs Teach Savings to Ease Poverty

Programs Teach Savings to Ease Poverty

Programs Teach Savings to Ease Poverty

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A few years ago, Mike and Dawn Ferrill of Tulsa, Okla., were struggling financially. Then they heard about a program that matched their savings, which they used to build an appliance repair business. Photos by Greg Allen, NPR hide caption

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Photos by Greg Allen, NPR

A few years ago, Mike and Dawn Ferrill of Tulsa, Okla., were struggling financially. Then they heard about a program that matched their savings, which they used to build an appliance repair business.

Photos by Greg Allen, NPR

Dorie Simmons is seen teaching an SAT prep course at the local YMCA. Eight years ago, she lived in government-subsidized housing. Now, thanks to an asset-building program she and her three children live in a spacious home in one of Tulsa's nicer suburbs. hide caption

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Dorie Simmons is seen teaching an SAT prep course at the local YMCA. Eight years ago, she lived in government-subsidized housing. Now, thanks to an asset-building program she and her three children live in a spacious home in one of Tulsa's nicer suburbs.

Some organizations have found a way for low-income people to save money, then build on those savings over time. One such program in Tulsa, Okla., has brought life-changing financial security to local residents, some of whom were able to build a business.

ABOUT INDIVIDUAL DEVELOPMENT ACCOUNTS

 

What is an Individual Development Account?

 

An Individual Development Account, or IDA, is a special savings account for people with low incomes. Participants who save in an IDA have their money matched, dollar-for-dollar. Typically, the savings and match money can be used to buy a house, pay for education, or start a small business.

 

In addition to earning match dollars, participants learn about budgeting, saving, banking and more when they open an IDA. In most cases, people who open IDAs (account holders) are required to attend financial education classes. Account holders may also receive one-on-one counseling and other training.

 

Why is the money matched?

 

The match is designed to encourage and help account holders to save enough to buy an asset, such as a house or business. While a paycheck helps buy food and clothing and pay bills, an asset provides financial security for the future.

 

Where do the match dollars come from?

 

Match dollars for IDAs come government agencies, private companies, churches, local charities and other sources. Any individual, organization or business can contribute match dollars to IDAs. In most cases, donors can get a tax deduction for contributions to IDAs, and they are also recognized for helping others in their community.

 

How do IDAs work?

 

IDAs are usually offered through programs that involve partnerships between local non-profit organizations and financial institutions. The local non-profit is also called the IDA program sponsor. The IDA program sponsor recruits participants for the IDA program, provides financial education classes, and may also provide one-on-one counseling and training to participants.

 

After signing up for an IDA program, each participant opens an account with a partnering bank or credit union. The bank or credit union handles all transactions to and from the IDA. Each month, IDA participants receive a report telling them how much money — savings, match and interest — is accumulating in their IDA.

 

How long does an IDA last?

 

An IDA program can be as short as one year or as long as five years from beginning to end. IDA participants are allowed to withdraw money as soon as they have reached their savings goal, but they must first get approval from the IDA program sponsor. Some IDA participants choose one big savings goal, such as a home, but others save for a number of related goals, such as textbooks and college tuition.

 

Do IDA savings have to be used to buy a house, pay for education or start a small business?

 

These are the most common uses for IDA savings, but each program is different. Some IDA programs allow participants to save for home repairs, computers, automobiles or retirement in addition to the three uses above. Other programs have just one purpose, such as to help people start their own businesses.

 

How can I open an IDA?

 

There are more than 250 IDA programs in the United States, so the first step is to find a program close to where you live. The IDAnetwork Web site lists programs by state. Contact the sponsor(s) closest to you to find out more about their IDA programs and how to apply.

 

Source: Corporation for Enterprise Development (CFED)

Dawn and Mike Ferrill live in a small, three-bedroom house in Tulsa. And their four children, all home-schooled, a dog and a cat make their house seem even smaller. It's a household that today is hectic, but comfortable.

But back in 1997, they were struggling. Mike had recently started his own appliance repair business and Dawn, who managed the family budget, was trying to make ends meet on just $300 per month.

That's when they heard about a program for people with low incomes that was too good to ignore. It would match, dollar-for-dollar, savings used for things such as buying a home or building a business.

Mike saw it as a great opportunity.

"For people that didn't make much money, it was kind of like a poor man's 401k. If we could put $62.50 per month away, they would match it dollar-for-dollar," Mike says.

Dawn remembers that money was so tight, she couldn't even afford clothes at the thrift store.

"I had to beg friends, 'Do you have any clothes that don't fit your kids anymore?' So to scrape $62.50 was really, really hard," she says.

But by scrimping just a little more, the Ferrills say they were able to begin putting the money away and open something called an Individual Development Account. After more than a year, they had enough money for a big ad in the telephone directory for Mike's appliance-repair business. Business started picking up.

Today, with an income of about $30,000 for their family of six, the Ferrills are far from wealthy. But they say they're comfortable, and they've started a second business: supplying and servicing vending machines.

Another important change: They've learned to save. That includes the children, who often choose to save instead of spend.

The Ferrills were part of a demonstration project conducted in 13 cities across the country. It looked at whether low-income people could be encouraged to save money and use the savings in ways that would improve their lives.

In Tulsa, the program was run by a nonprofit group called Community Action Project.

CAP Director Steven Dow says the results were encouraging. More than one-third of the people who enrolled were able to save money, get the match, and use the funds to build assets.

"The notion of living beyond our means has been demonstrated by the federal government and by middle- and upper-income families all across this country," Dow says. "Even in the face of that as a national culture, poor people, given the incentives, could and would save. They are so eager to have a different future for themselves that they will do what the rest of us are not doing."

Hundreds of organizations and more than a dozen states are now using Individual Development Accounts to help clients buy homes, set up businesses and save for school.

There are about 50,000 such accounts around the country. But that number may grow. President Bush has budgeted money for a federal program. And a bill currently in Congress would provide more than $1 billion to set up about 900,000 IDA accounts.

As promising as IDAs are, they don't always work. Studies have shown they've been used most effectively by people with steady jobs who are strongly motivated to improve their financial situation. And the programs are expensive. Along with the money needed to match savings, IDAs are costly to administer, requiring close supervision by caseworkers.