What would you do if you suddenly lost your job? How would you pay your bills? Your success in weathering such a storm would depend upon your ability and discipline in developing assets, i.e., to somehow save money. Financial assets enable you to obtain real assets like a home, an education, a business start-up, or a comfortable retirement. They also provide a hedge for times of acute financial need.
In 2004, the top 20% of the U.S. population had 93% of all assets. The bottom 40% had 1% of all assets. 28% of people had zero net worth. 40% had enough assets for to survive for one week, 60% had enough for 2 months.
The federal government has historically encouraged the upper and middle classes to accumulate assets, while discouraging the poor. The Homestead Act, the GI Bill of Rights, and the Federal Housing Administration are all popular federal programs that helped middle class people accumulate assets, like a home or an education. However, public assistance programs have, until recent years prevented asset development for the poor, focusing instead upon maintaining income. Those policies had the unintended consequences of keeping the poor in a poverty trap, because it takes assets to improve one’s financial situation.
Individual Development Accounts provide a way for the poor to escape the trap. Simply, an IDA is a savings account for the economically poor. The individual saves for a qualified purchase that is income related, like a car, a home, a business, or an education. Their savings is matched at a rate between 1:1 to 1:3 by funds from the federal or state government, financial institutions, foundations, churches, or individuals. The amount accrued in these accounts is usually small, averaging $700.00. They are coupled with financial literacy training and provide the opportunity to develop positive attitudes and practices through involving the participants in savings.
They will not abolish poverty, but they make a lot of a sense as a way to help the “moderately poor”. They respect individual dignity. They are a partnership approach in which the person needing help becomes part of the way forward to improve their own situation. It is nice combination of personal responsibility and generosity. They work best when mentoring is involved, so people get a chance to help and encourage a person who is struggling financially.
The Chalmers Center for Economic Development of Covenant College is a pioneer in IDA’s and has some great resources for churches and organizations that are interested. I just finished two amazingly helpful classes offered by the Chalmers Center.
Originally posted July 7, 2010.