IDAs: A smart way to get ahead
We know how little of your paycheck is left after all the monthly bills are paid.
Saving a few bucks a week hardly seems worthwhile.
But it can be, especially if you put that money in an Individual Development Account that matches every dollar you save with an additional $2 or more.
Set aside $10 a week and your IDA could grow to $1,500 in just one year.
IDAs aren't well-known, but they're one of the smartest ways for many low- and middle-income families to save and see a big difference in their lives surprisingly soon.
Not everyone can qualify and you have to use your savings for a very specific goal.
Buying a house is the most popular. But opening a business, going back to school, purchasing a car or creating a retirement fund can all be acceptable goals as well, if you find the right IDA.
Spending just a few minutes with our five-step guide to Individual Development Accounts can show you how they work, how you could benefit, and how you can qualify.
Step 1. Locating the IDA programs near you.
More than 500 non-profit community organizations and churches in low- to middle-income neighborhoods across the country sponsor IDAs.
Those sponsors write specific rules to qualify for one of their IDAs and determine the goals they'll support with matching funds.
They also recruit government agencies, businesses, charities and individuals to donate the matching funds, and find a bank or credit union willing to administer the accounts and provide participants with detailed monthly statements.
Step 2. Selecting a goal and an IDA that's right for you.
Every IDA requires you to save and work towards a specific goal.
But every IDA doesn't support every goal.
So start by selecting a goal that makes sense for you, and then ask each program you contact if its rules allow matching funds to spent for that.
The most widely supported goal is buying a home.
In November alone, a dozen families used their savings and matching funds to make down payments on house in Charleston, S.C. homes they would never be able to buy without their IDAs.
"It just shows what can be done if people are given the tools to do something," says Lenore McKenna, executive director of the Charleston Area Community Development Corp., an IDA sponsor. "We've changed a lot of lives down here."
Starting a small business is a popular goal in parts of the country where home prices are so high and it's unrealistic to think you can save enough for a down payment in just a few years even with the help of such a program.
Aspiring day care owners have used IDAs to bring their homes up to stricter codes, buy equipment and cover licensing fees. Others have gone into carpet cleaning and learned CPR so they could start a business teaching CPR to others.
Education is a third goal supported by most IDA programs. Participants can seek a new skill, such as hair styling, take computer classes so they can qualify for a new, higher-paying job (and perhaps buy their own computer), or save for course work that will help them advance in a job they already have.
Step 3. Qualifying for an IDA.
Next you'll need to see if you meet your favorite program's specific financial requirements. In general:
- Your income can't exceed twice the national poverty level. That's about $40,000 a year for a family of four, which is just a tad less than the national median family income of $42,326 a year which means half of all families make more and half make less.
- Your assets, not counting your home and one car, can't exceed $5,000 to $10,000.
- You can't be so deeply in debt that it's impossible to save even a few dollars a week.
Step 4. Building an account.
When you sign up for an IDA, you'll establish a savings goal and agree to make minimum scheduled deposits until the goal is reached. Although minimum deposits vary, they can be as low as $10 a month.
While there are no limits on how much you can save, most programs limit how much it will match each year $500 is typical, but some will match more.
You will also be required to attend 10 hours of money management classes that explain how to read a bank statement, open a checking and savings account, plan a budget and make smart financial decisions like avoiding payday loan stores.
Another six hours of goal-focused classes will discuss what lenders expect whey you apply for a mortgage, or all the costs you must consider before starting a new business.
Step 5. Cashing in...Moving up.
IDAs are not long-term propositions. Most programs expect you to achieve your goal in one to five years, depending on what it is and how much you can afford to save.
"We like to have people out of the program and on their way in 18 to 24 months," says Woody Woodrow, director of the Texas Asset Building Coalition in Austin, an IDA sponsor.
If you run into a financial bind and need to withdraw your savings before you reach your goal, you can do that. Your money is always yours.
But matching funds can't be withdrawn until you've saved enough to turn your goal into reality. Then you can make one big withdrawal, such as for the down payment on a house, or several partial withdrawals to pay for tuition and textbooks over a number of semesters.
The IDA always gives matching funds directly to a third-party such as the school you're attending or the person you're buying a home from. It is never given to you.
"It's not a handout,'' Woodrow says, "it's a hand up."
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