Do you like playing the lottery?
Then you’ll LOVE turning your savings account in to a lottery ticket!
OK, that sounds worse than it is, but that’s the general concept behind Save to Win and other “prize linked savings account” promotions that credit unions in many states can participate in.
With Save to Win, for example, account holders can buy shares in one-year CD shares at a participating credit union. With a minimum start of $25, members can then make additional deposits in to the share. Each $25+ deposit results in a free lottery entry, with up to 10 entries per month per member. Participants then get the normal CD rate from that Credit Union and get to keep the interest.
Lotteries, by nature, can appeal to lower income households, because the possibility of winning the lottery represents a quick-win chance for a different/bigger/better/easier/spendier life. Sadly, lotteries offer the worst odds in legal gambling – only 55% of ticket purchase price is paid out in prizes. Yet, Americans spend an average of $540 per household annually on lottery tickets. That’s bad.
Fortunately, there is no cost to enter a prize-linked savings account lottery. By virtue of your depositing, you get a free entry.
Credit unions win, because it incentivizes lower income members to save more, improving the credit union’s deposits and balance sheet. Save to Win claims to have created 50,000 accounts that have saved a total of $94 million.
Theoretically, participants also win because instead of paying hard-earned money for a meager chance to win a state lottery, the same gambling bug can be quenched through a much healthier saving habit creation. I’d hope that’s what is going on, because I suppose the reverse could be true as well (they get a gambling bug through a prize-linked account and then go and piss it away on lottery tickets or other forms of gambling).
Unfortunately, with one-year CD rates hovering around 1% APY and below, participants won’t financially benefit much from their newfound habit (unless they win a rare jackpot).
I am concerned that the focus is only on winning lottery jackpots and if that doesn’t happen, the savers pull their money. I know this is a stretch, but I hope this is the natural progression that results from these type of incentives:
- Non-saver is drawn in to the program.
- Non-saver has an awakening and is transformed in to an avid saver, diverting lottery ticket and other gambling expenditures in to additional savings.
- Non-saver realizes that they can achieve much better results by moving their savings from a bank account to an investment brokerage account.
- Newfound investor makes enough from their investments to make the prospect of winning the lottery irrelevant.
Heck, even if just #1 and #2 happen, then it’s a net positive. I realize that it is not in the best interest of participating credit unions to educate/encourage #3, but perhaps it should be? One can hope – and isn’t hope what the lottery is all about, after all? Besides, at 1% APY, participants are literally losing money over time with inflation.
Do you participate in any prize linked savings accounts? Which ones? What are your thoughts on them?
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I’m not a lottery player, but I do play a dollar or two every few months (gotta be in it to win it). I think this is a great way to both save money and not waste your own money playing the lottery. I don’t think my credit union has this program, but I will ask and see if they do.
I think if it encourages savings, it’s definitely a net positive. There’s probably more net good for one person to receive $100,000 then 100,000 people receiving $1. Reminds me of a podcast I listened to on Freakonomics a few years ago: http://freakonomics.com/2010/11/18/freakonomics-radio-could-a-lottery-be-the-answer-to-americas-poor-savings-rate/
Actually, the 55% that is paid out is actually too high a number. When a lottery winner gets money for the next twenty years, that total is the amount of the winnings but the lottery people buy an annuity that pays out over the twenty year period. Some lotteries allow a single payment of about 40% the winning amount, so you are really looking at 40% of the 55%, or a real payout of 22%.
This is a very interesting concept that I never knew existed. Boy I sure hope this is working in a positive way by bringing in non-savers and helping them learn to save. That would be great!
Hi,
It’d be great if you changed your RSS feed to include the full content of your posts, instead of a snippet. You’ll attract more readers that way, particularly those that peruse blogs through feed readers. Thanks for considering this.
The interest rate may be small but the savings mindset is important to establish before investing mindset. What is sad though is banks will do these to improve their deposit balance and the common teller and bank users think “oh what a nice bank, they are giving me $50 for a 1000 dollar deposit” when the bank will be able to make it worth their while. Besides gambling / savings plans, I highly recommend signing up for a bank account that has a signing bonus, sometimes it can reach $200! That being said, I don’t advise opening an account at a 2nd or 3rd bank unless it truly makes sense.
Very interesting concept. In the UK we have premium bonds which are backed by HM Treasury. You buy Premium Bonds and then one lucky winner wins £1 million per month. Great concept.
This is a very cool concept. All though I will say I am a little torn. The concept of getting something for nothing does not set well with me. In this case you are taking something that is not a something for nothing event. But it is given a spin of being such.