More than a quarter of the United States population have no emergency fund. Furthermore, the trend is to neglect saving anything in light of rising costs of living, lay-offs, foreclosures, and other financial hardships in the recovering economy. While I believe more people need to realize they can’t afford NOT to save, there are admittedly few incentives to maintain a regular savings account, especially when most bank-based accounts feature lack-luster interest rates. One way that banks have been attempting to improve Americans’ savings rates is with the expansion of prize-linked savings accounts.
The concept works a bit like a lottery. Participants who meet the savings criteria (such as depositing minimal or specific amounts, maintaining balances, and leaving money untouched) are entered into cash drawings on a regular basis. Prize funds are then added to the winner’s savings account. Unlike traditional lotteries that encourage people to waste money for the small chance of winning, everyone who participates in prize-linked savings accounts is financially better off, whether they earn extra cash or not. This is because the simple incentive of winning a little extra something keeps many people motivated to leave their money in the bank, untouched, and build up an emergency fund.
The largest of these programs is known as Save to Win, and was launched in Michigan in 2009. While these accounts still aren’t widely accessibly, there are currently four states that have legalized them — Michigan, Nebraska, North Carolina, and Washington. The research in these states has shown significant increases in the number of savings accounts among lower-income populations, the key target audience, as well as a total increase in savings account holdings. While most programs include cash prizes, some are based on a points systems that further qualifies participants for sweepstakes involving cars, vacations, and other non-cash prizes.
Although credit union advocates and other financial gurus are highlighting the positive effects of prize-linked savings account programs, and lobbying to promote them in other states, many are skeptical of the ethics and wisdom of using prizes as an incentive to save money. In my opinion, anything that encourages people to save rather than spend their earnings is worth looking into. People like to spend money, and they like to think they’re getting something for nothing. ‘Tricking’ yourself into saving money by marrying it with the excitement of ‘gambling’ still results in savings, no matter how you look at it. Of course, being motivated by prizes alone is an immature approach to personal finances, but for many people, it’s a place to start. Getting in the habit of saving money is the biggest hurdle to this important financial practice, but once it’s started, is much easier to maintain.
Starting to save money, no matter how little or how tight your finances are at the time, will show you what you are capable of if you put your mind to it, and will create a foundation of financial stability for the future. While I’m not currently enrolled in a prize-based savings account, it’s definitely an idea I would consider. How about you?
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