Savings Accounts

Janet Smith, a single mother with two young children in Washington, D.C., knows college is expensive even with financial aid. Janet's children are good students and want to go to college. Janet sees commercials on television about ways to save for college, but those appear to be meant for someone other than her, people with a lot more money than she has. Janet is correct about that. Financial services firms overlook her aspirations because she is poor, but what do they really know about Janet?

The notion that poor parents want anything different for their children than parents in higher-income families is contradicted time and again when talking with real people. For millions of low-income working parents like Janet Smith, savings can have the transformational effect of turning dreams into reality.

For most people, having a structure that makes it easy to save means they are more likely to do so. Bank accounts are a common example of such a structure. The problem for people in Janet's income bracket is less about having the will to save and more about having a structure and a plan that allow savings to multiply. But many low-income communities have been abandoned by banks. Employers often provide another structure by including a 401(k) plan in their benefits package. Unfortunately, low-wage jobs are not likely to offer an employer-sponsored retirement plan.

Some well-meaning people act surprised by the idea of supporting poor people's efforts to save money. "Don't they have to spend all of what they earn to get by?" Of course it is harder for poor people to save, but it is a miscalculation to think they don't or won't save. Poor people save money routinely to pay bills or to make household purchases. Saving for a new refrigerator or a used car are not on the scale of saving to buy a home or to put a child through college, but it's clear that poor people do save to acquire assets and can be as disciplined about their goals as anyone else. Research shows that people with low incomes save to acquire assets. ¹

Beginning in 1997, a national research study known as the American Dream Demonstration was launched to test the effectiveness of savings programs for poor people. From 1997-2003, researchers examined 14 small-scale pilot programs set up as Individual Development Accounts (IDAs), a new model to promote saving with matched contributions by a government or private entity. Researchers studied a group of 2,000 people participating in IDA programs. Their average household income was 116 percent of the poverty level, and their average savings per month was $19.07. With an average match of 2:1, the amount saved per participant was approximately $700 per year. ²

Obviously it takes time to accumulate a substantial amount of savings, but a small business can be capitalized with a few hundred dollars and a home purchased with a down payment of a few thousand dollars. Most participants in the study were saving to purchase a home, followed in order by to start a small business, post-secondary education and home repair.  In interviews with participants, researchers found that the IDA motivated people to stay employed longer and to work more hours than they did before. An impressive 93 percent of participants said they felt more confident about their future, and 85 percent felt more in control of their life. ³   

Endnotes

1. Mark Schreiner, Margaret Clancy, and Michael Sherraden (2002), Saving Performance in the American Dream Demonstration: A National Demonstration of Individual Development Accounts, Center for Social Development.
2. Ibid.
3. Amanda Moore McBride, Margaret Lombe, and Sondra G. Beverly (2003) The Effects of Individual Development Account Programs: Perceptions of Participants, Social Development Issues 25 (1&2), 59-73.