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Financial Assets

State policymakers have a new option in helping low-income families break the cycle of poverty. Asset development-which emphasizes achieving self-sufficiency through savings and investment rather than through spending and consumption-can compliment the current policies that provide income-based assistance to the poor.

In the 1990s, some states began helping families build up financial assets through Individual Development Accounts (IDAs). These are savings accounts matched with public and private funds. They are dedicated to such things as a housing down payment, education or job training, or capitalizing a small business. IDA programs generally require account holders to participate in a financial education program.

The Personal Responsibility and Work Opportunity Reconciliation Act of 1996 (PRWORA) authorized states to create IDA programs using federal Temporary Assistance to Needy Families (TANF) dollars and disregard this asset in determining an applicant's eligibility for public assistance. At least 31 states had an IDA program by July 2001, either with or without a match. IDAs target displaced workers, working-poor families, TANF recipients and immigrants, among others. Community organizations or public agencies manage the programs, which involves providing financial training to participants and authorizing their withdrawals of money. Participating organizations include community development corporations, credit unions, United Way agencies, housing agencies and religious institutions. Funds are deposited in banks, thrifts or credit unions. The traditional savings account generally is owned by the IDA participant. Matching funds are held and controlled by the managing organization. Matching rates usually range from $1 to $4 for each dollar saved.

Many IDA programs include a financial education component. Financial literacy classes are designed to help participants build good credit histories, avoid predatory lending situations, and pay off debt. In some cases, case managers work with participants to develop plans to address barriers to saving money, such as poor spending habits and bad credit histories. Participants may also benefit from the peer support gained by interacting with individuals with similar financial goals through participation in the financial literacy workshops.

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