According to a study by the Census Bureau more than one in four working American families is low-income. Despite working the equivalent of 1 1/4 full-time jobs these families cannot break through to moderate-income levels. Accumulation of assets is a doorway out of financial strife but the challenge is amassing the funds necessary to engage in wealth-building opportunities.
Individual Development Accounts (IDAs) are one of the more popular asset creation tools – in which participants receive a matching grant for every dollar saved. Usually, the funds the family receives must go towards the purchase of a home, small business, or continuing education. There are other IDAs that offer different savings goals, but these are less wide-spread and specific to local need. In Los Angeles we are seeing IDAs phasing out to be replaced by accelerated savings programs – such as Ramp-UP and micro-finance programs. Ramp-Up, essentially, has the same end product as any IDA; an awarded, guaranteed sum of money to the participant. How Ramp-UP differs is that funds are collected in a custodial savings account for 15 months. At the end of the term the participant receives an amount to add to their savings. Those funds can be withdrawn at any time with no penalty, for any purchase and use. Currently, Ramp-UP accounts in Los Angeles offer a grant equivalent of up to 22% APY.
Ramp-UP is designed specifically to demonstrate the benefits of savings (for the longer-term) with high interest that accelerates the rewards of consistent saving over time. The catch? Well, there is a maximum that you can receive in subsidized interest, regardless of how much you deposit monthly or initially. And there are income guidelines, to ensure the program can only be utilized by those it’s directed for. Beyond that Ramp-UP is a real opportunity to create savings for the LMI family. This will be the first investment many of our families will partake in, that will expose them to no built-in risk (but nothing can eliminate “natural risk” aka “life happens”) and guaranteed profit. It’s the perfect segue to government-backed bonds, high-yielding interest bank accounts, and even IRAs (Individual Retirement Accounts).
IDAs are a great tool but they are not the panacea to rise from poverty. Additionally, I am concerned about any program that encourages a LMI family to rest their future savings and impact their cash flow with the purchase of a home or in the investment of a small business. It’s an unconventional idea, but I cannot help but consider that if done incorrectly buying a house, launching a small business, and even a school tuition can disrupt a family’s finances even more – especially since the perceived payoff are realized (happen) at a later time. For example, one can say paying tuition for college will pay off with a higher-paying job in the future. First-time home buyers can argue their home will rise in price over time. Small business owners can anticipate a profit-turning operation. Though, nothing is guaranteed. These risks, I believe, can be alleviated with proper education and training as the participant saves. IDAs can remain asset specific. Additionally, the family could use Ramp-UP to create an emergency savings fund.
Despite the average American earning less income to their expenses and steady unemployment are we still better off then our generations past? One thing for sure is that today there are several more opportunities for the LMI family to save beyond financial services available to higher-income earning population. Community organizations have already brought IDAs and now Ramp-UP to their neighborhoods. President Barack Obama’s Savers Tax Credit is federal move to incentivize saving for retirement. And now, I believe, the internet is poised to be the next platform. It will just be a matter of finding an effective middleman to connect the resources with the family.
If we want to reach America’s ‘unsaved’ we need to create products that reflect LMI family challenges, cash flow risks, and needs. The buck can’t stop there (pun intended). These products need to be marketed effectively so that the people that need them the most can use them. IDA, Ramp-UP, and other programs that accelerate savings are a step in the right direction because they simply don’t offer free money but rather require the participant to invest their money for the long-term and then reap the rewards. Lastly, LMI families need to have access of an array of products and programs that can all be used simultaneously.
IDAs, for instance, ensure a participant can use accumulated savings for a specific person. They must commit to their selected asset goal in order to receive the benefits. Until then, their funds remain “locked up”. Ramp-UP accounts are flexible for the LMI since the participant can withdraw at any time without penalty and funds can be used for whatever purpose. They are also “low-touch” products for the participant since there is no required classes or meetings to attend. Both programs are useful for the ‘unsaved’ since they expose financially-strapped, but capable families with opportunities to amass savings and wealth.