The unexpected way lotteries can boost your savings
September 10, 2013
The meager savings account interest rates found at most financial institutions may not be enough to convince everyone to stash their money at the bank, but offering a chance to win a cash prize for making a deposit may bring dramatically more savers into the fold.
That's according to recent research by several groups on the subject of prize-linked savings accounts. The chance to win big seems to be a sufficient motivation for many individuals to save in everything from savings bonds to certificates of deposit (CDs).
The link between prizes and savings
Last month, the non-profit Doorways to Dreams Fund issued a report on its Save Your Refund program, which encouraged those receiving a federal tax return to put at least $50 in a qualified savings account. In exchange, they would be entered for a chance to win a $250 weekly prize or a $25,000 grand prize.
Although relatively few individuals took advantage of the program in its first year -- only 772 entries were received -- Doorways to Dreams says it was pleased with the results and that it plans to run the promotion again in 2014. The average participant saved 33 percent of their tax return, and $691,797 was saved in savings bonds, savings accounts, CDs and IRAs, among other qualified options.
The Save Your Refund program comes on the heels of Doorways to Dreams' highly popular Save to Win pilot program in Michigan. That program enters individuals into cash drawings for every $25 they deposit into a savings certificate at participating credit unions.
In 2012, more than 15,000 individuals participated in the Save to Win program at 58 Michigan credit unions. They saved nearly $44 million and had an average year-end balance of more than $2,800. In addition, 82 percent of accounts open in December 2011 rolled over to 2012. What's more, 94 percent of self-reported non-savers rolled over their accounts, which may indicate that a cash prize trumps today's CD yields when it comes to encouraging savings.
The trouble with prize-linked savings
While prize-linked savings accounts appear to be successful at luring non-savers to deposit money, they also aren't legal at most of the country's major institutions. According to policy research group The Heritage Foundation, federal law restricts the use of prize-linked savings promotions at banks.
But while the promotions may be off-limits to banks, credit unions in some states can offer cash prizes as an incentive for saving. In a May 2013 report, The Heritage Foundation notes that 10 states may allow credit unions to offer prize-linked savings.
As concerns grow about the ability of many Americans to retire comfortably, more states could warm to prize-linked savings options. In June 2013, the National Bureau of Economic Research issued a paper indicating that prize-linked savings were particularly appealing to lottery players and those with low bank account balances -- groups that may especially benefit from having more money in the bank.
If these programs do take off, entering the lottery may eventually pay off for plenty of savers -- even if they never claim a jackpot.