Low to Moderate-Income Without a Bank Account but Want to Purchase a Home, Education, or Save for Retirement?

So, you want the American dream, but you're not earning much and are not sure when (and more pessimistically, if ever) you will begin earning more? I came across a type of account that is being hailed as a Win-Win SOLUTION for YOU and participating banks. It's called an Individual Development Account (IDA).

IDA's allow low to moderate-income earners the opportunity to SAVE towards a FINANCIAL GOAL (i.e. purchasing a house or home repairs, financing an education, starting or expanding a business, buying a car or paying into a retirement account). But let's face it, these goals require more than pocket change and some lint. Instead, they are large investments that can prove difficult to save for on one's own. So, the best part is, individual contributions are MATCHED! And I don't mean matched 50 cents for each dollar you put in (though 50 cents is better than nothing). The matching rate can range from dollar for dollar or eight dollars matched for every dollar you contribute. To be fair, because I know your heart is racing, "Eight dollars for every dollar I put in!!! Am I on Oprah???!!!," the typical match rate is two to three dollars for each dollar you deposit, which is still more than you'd have on your own anyway. As I mention above, you're saving with a financial goal in mind, so what you save in an IDA canNOT be withdrawn for the next concert, date or random expenditure, and the money can't be touched for a specified period of time. If you ask me, it's best that way. A penny earned and a penny spent leaves no penny at all, and that would defeat the purpose of you saving, wouldn't it? You are held to parameters.

WHO IS SETTING THESE PARAMETERS?

Community/non-profit organizations, divisions of state or local government, or banks who create the IDA are called "sponsors." Sponsors are responsible for applying for matching funds and depositing them in reserve accounts at financial institutions. The sponsors therefore decide who qualifies for the individual development accounts and what the parameters are. Below are some typical eligibility standards, but don't be discouraged. These standards vary from organization to organization and you may just be able to find one for you.

THE STANDARDS (borrowed from FDIC article, reference link below):

• Maximum income levels—These levels are generally expressed as a percentage of the federal poverty guidelines or the area median income figure.
• Net worth—Some programs limit the level of household assets (such as a car, equity in a home, or other savings) that a qualified applicant owns. For example, applicants cannot participate in some programs if they own assets in excess of $5,000.
• Earnings—Many programs require that all or a part of an applicant’s savings come from earned income, most commonly a paycheck. However, public assistance payments, such as unemployment checks, TANF funds, disability payments, and Social Security, also usually are considered earnings.
• Credit history—Poor credit or heavy debt levels may disqualify applicants under some programs.
• Limitations on withdrawal—Withdrawals typically can only be made to buy a home, pay for education, or start or expand a small business. Some states restrict the purpose of the accounts even further, while others permit withdrawals for home repairs or automobile purchases. A prohibition period, usually one to three years, is common for withdrawals of matched funds. This period, which usually coincides with the length of time during which the funds are matched, allows time for the savings to accumulate.
• Financial education requirements—In most cases, participants are required to attend financial education classes, such as the FDIC’s Money Smart curriculum. Participants also may receive other types of financial counseling or training.

So, I WIN $2 bucks on every dollar and eventually my achievement. What do the banks WIN?

Banks win a relationship with you. Banks want to make money. So, when you open an IDA and finally withdraw your money perhaps you'll decide to choose them as your home lender. Or better yet, you'll choose them for all of your banking needs. You could open checking, savings and credit card accounts with them. Those accounts are their bread and butter. To increase their store of bread and butter banks must attract more customers. Low to moderate-income earners are usually either not using the mainstream banking system (i.e. using check cashing facilities versus bank checking account, purchasing money orders as opposed to using checks, etc.) or they use the banking system, but not as much as they could. As a result, low to moderate- income earners conduct transactions that help fuel a $250 billion non-mainstream banking business. Banks need to recruit and maintain their customer base. If they do right by you, you will likely do right by them by becoming a regular account holder. Even better, you'll tell your friends. Most IDA programs are set up such that community organizations partner with banks which will provide all or a portion of the matching funds (state programs, non-profit organizations and corporations pick up the rest) along with services like providing bank statements. Certainly, the community organization that introduces you to the IDA will praise the bank's involvement in helping you build assets (i.e. that home you bought or the education you now have or are acquiring).

YOU CAN DO THIS. PERIOD.

Complete a Google search for individual development accounts and or contact local agencies/organizations: Department of Community Affairs, Department of Community Development, Department of Social Services, Department of Workforce Services. Whatever the name of the department in your state, seek and you shall find. THEN, SAVE!

Link to a document that lists IDA contacts for each state

"Individual Development Accounts and Banks: A Solid "Match"