Improving Financial Stability Among Low-Income Adults

Tiffany McCormack and Erica Zielewski, Senior Social Science Research Analysts, Office of Planning, Research, and Evaluation

The U.S. economy is showing signs of recovery from the 2008 Great Recession, but many American households are still financially unstable. Low-income households especially continue to struggle financially, making it difficult for families to withstand unexpected expenses and save for the future. Earlier this year he Federal Reserve reported that almost half of American families did not have $400 saved to cover an emergency expense like a broken-down car, medical bill, or job loss.

ACF’s Assets for Independence (AFI) program encourages low-income individuals to save, and promising new evidence shows that it’s working. In the first rigorous evaluation of the program, we find early evidence from two projects in Albuquerque and Los Angeles that AFI increases low-income participants’ savings, reduces material hardship and use of alternative financial services like check cashing services, and improves participants’ outlook on their financial well-being after one year in the program.

Established in 1998, AFI is a grant program administered by ACF’s Office of Community Services. Grantees connect participants to special-purpose, matched savings accounts called Individual Development Accounts (IDAs). Every dollar of earned income that a participant deposits into an AFI IDA is matched at least one to one and up to $8 per dollar. Participants can use their IDAs and matching funds to purchase a first home, to capitalize a business, or to fund postsecondary education or training. AFI grantees also provide training and support services to participants, such as financial education, debt and credit counseling and repair, and guidance in accessing refundable tax credits.

The AFI evaluation saw several additional important and promising findings:

AFI increases liquid assets among participants

Approximately 12 months after enrolling, participation in AFI led to a 9% increase in the share of participants with any liquid assets (e.g., savings held in checking accounts, savings accounts, stocks, bonds, retirement accounts, and money market accounts), and increased participant’s liquid assets by an average of $799.

Participants experienced fewer material hardships

One concern in encouraging savings among low-income individuals is that it might make them more susceptible to unexpected hardships since they have less cash on hand to cover emergency expenses. But the study showed that over the last six months families experienced a 34% decrease in material hardships (defined as the participants’ inability to pay for housing, utilities, or medical care).

AFI reduced participant use of alternative financial services

Alternative financial services like check cashing services, money orders, pay-check advances, or payday loans often have higher interest rates that can undermine individuals’ abilities to pay off debt. The report shows a 39%decrease in the use of alternative financial services among AFI participants, indicating that participants were connecting with more mainstream financial services and avoiding costly financial products.

Participants had greater confidence in their financial security and believed their financial situation had improved

AFI participants reported greater confidence in their ability to meet monthly living expenses. The program led to a 10% increase in participants’ perceived positive financial outlook, suggesting that participants felt more confident about their financial situations and their ability to save for the future.

While higher-income families often receive financial incentives through the tax code, there are very few incentives available for low-income families to save money. These findings demonstrate that incentives in the form of matched savings can help low-income families save and reduce hardship, and show AFI’s promise for improving short-term stability and encouraging longer-term upward mobility.

If your organization is interested in offering AFI Individual Development Accounts, please review this information for prospective grantees.