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Tess Vigeland: Here’s an alarming statistic for the financial well-being of Americans: the Bureau of Economic Advisors says we saved less than 1 percent of our incomes in 2007.
But there is a tool some low-income people can use to help them save. Peter Granitz tells us about the Individual Development Account.
Peter Granitz: Far away from the Golden Gate Bridge in San Francisco’s Mission District, it’s difficult to walk a block without coming across a pawn shop or payday loan store.
It’s also the neighborhood Zenelia Roman lived in after emigrating from Nicaragua.
Zenelia Roman: The gangs and the drugs and the alcohol and all that. I was like “No, I have to get my children out of here.”
She’s one of almost 60,000 Americans who’ve benefited from an Individual Development Account. IDAs match the savings of debt-free, low-income people with both federal dollars and private donations. Think of them as a 401(k), only IDA savers must use the money for college, a down payment on a home or starting a small business.
Roman thought a home was the quickest way out of poverty and into a safer neighborhood. She was a 30-year-old sophomore in state college when she first learned about the program.
Roman: They had this banner that said “Save money and we’ll give you $2 for every $1 that you save” and that just got me to them, because I need money, right? Okay, so what do I have to do?
Non-profits offer them, just like any bank would offer an account. Ben Mangan heads EARN, a San Francisco non-profit. Like other IDA sponsors, his group defines assets as wealth or investments that stay for the long haul.
Ben Mangan: At the end of the day, what we offer has to be about someone’s larger vision for themselves and their families.
Right now, there are more than 500 IDA programs across the country, but they don’t just match anyone’s money two-to-one. To qualify, a person can’t have any outstanding debt — that means a mortgage, credit card, even student loans. And that’s not all. To qualify, you generally need to earn 100-200 percent of the federal poverty line. That’s about $20-30,000 a year for a family of four.
Carol Wayman is the legislative director for the advocacy group Corporation for Enterprise Development. She says the idea of IDAs has started to gain momentum in Washington, but the bureaucracy has yet to catch up.
Carol Wayman: And the way that federal programs have been structured is if you try to save and you’re receiving some kind of benefit like food stamps, you can get thrown off for saving.
Before opening their accounts, IDA savers need to attend financial education classes, like this one sponsored by EARN. These free classes range from daily budgeting to stocks and bonds and offer concepts people can use for a lifetime. Ben Mangan:
Mangan: If you take the Starbucks example and you get the largest latte they have, which is about $4 a pop, times five, that’s $20 a week times 50, which equals $1,000 right there. That’s $1,000 a year that someone could save a year if they made a different choice.
Roman, a married mother of two, was working her way through college when she took the required financial literacy classes. Then she realized she’d be smarter to pay off her last two years of college tuition with her IDA instead of buying a home.
Her life’s a bit different today. She earns money as a hospital researcher, a job she couldn’t have dreamt of without a college degree.
Roman: And I just can’t believe that, it’s so amazing. In a year or two, your life just dramatically changes.
About half of the people who’ve had IDAs say this is the first bank account they’ve ever owned. As new immigrants, Roman and her mother survived on about $60 a week. They couldn’t afford to save and school provided no guidance for Roman:
Roman: I remember my ninth grade counselor and I went to see him and I told him that I wanted to become a doctor. He laughed at me and said go find a man who can support me and have kids because I could never reach medical school.
She proved him wrong by getting into college and then tucking away $100 a month for tuition in her last two years. During that time, she saved $2,000 of her income. Thanks to that IDA, her $2,000 turned into $6,000 and her concern now is preparing for medical school entrance exams.
Roman: Actually, I want to go into research and yeah, I want to work at a public clinic where they give free services, so know I won’t make enough money, but I just do it because I want to.
And Roman continues to save about 10 percent of each paycheck. That’s about 10 times the national average. Mangan says Roman’s case demonstrates what IDAs seek to do: let people choose their own path and then pave it.
In San Francisco, I’m Peter Granitz for Marketplace Money.
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