By Kathryn Hazelett
Practically everyone knows that we should be saving, and yet we still don’t do it. Or at least we don’t save enough.
Add our general lack of savings to the fact that most families will experience a financial shock[i]within a year, and it’s easy to see that we really do need to save more. Without an emergency fund to fix the car or the water heater, many families will end up in a financial struggle just to get by.
And still, we don’t save. Why?
Well, the easiest answer is probably that saving is just plain hard. It requires foregoing the urge to get that special (or not so special) something now. And when many are already struggling just to make ends meet, the idea of putting money into a savings account really doesn’t seem possible or rise to the level of importance that it should.
Yet while we aren’t saving, we are spending money on other things.
For example, in Arkansas, the per capita spending on lottery tickets is $150. In other words, if lottery sales were spread evenly across the entire population, each man, woman, and child would be spending $150 on lottery tickets. What’s even more interesting is that individuals who earn less than $25,000 a year make up 26% of those who play the lottery, and those who earn less than $50,000 make up 63% of lottery players.
Could there be a way to harness this lottery spending and turn it into savings? Well, we’re glad you asked.
First, let’s look at why we buy lottery tickets. We are repeatedly told that there is only a tiny chance that we can actually win the lottery, so why do so many of us play? There are many reasons; one is “availability bias.” This is the idea that if we know someone like us who has won, we think that we can win, too. A quick google search of “Arkansas and lottery” is full of links to stories about recent winners. Winner here, winner there. But where are all the stories about the number of people who play and never win? Much greater odds, just not as newsworthy.
Another reason behind the high number of players is the “dramatic economic gain” from a win that provides a chance to change one’s financial future forever. We all like to dream about living in the mansion, paying off our debts, buying the sports car, etc… Yet to misquote the play Hamilton, “dreaming is easier, saving is harder.”
But maybe, just maybe, we can turn this impulse to play the lottery into an impulse to save? Southern Bancorp Community Partners has been exploring just such an idea. It’s called Prize-Linked Savings (PLS), and it offers some of the same upside with none of the downside.
Saving a little could lead to winning a cash prize deposited straight into a standard savings account, a place where it can actually grow and help a family facing a financial shock.
Here’s how it works. A financial institution launches a PLS program. Participants open a savings account with that financial institution. And if they save up to a set amount, they are entered into a drawing for a cash prize. Pretty straightforward, right?
It’s also been proven to work.
One CEO of a credit union that offered PLS accounts noticed that they were more effective at increasing savings than offering a CD with a ten percent interest rate.
PLS programs are also responsible for new accounts.
Looking at the datafrom 165 credit unions that offered PLS over the last 10 years in 13 states, there has been $190M in savings in 82,000 accounts, with an average of $2,409 saved in each account. That amount would go a long way toward protecting one from an unplanned financial jam.
Prize Linked savings is spreading closer to home, too. Sponsored by the Louisiana Credit Union League, Lucky Lagniappe[ii]Savings launched in 13 credit unions state-wide. In that program, a certain amount of savings in a certain amount of time qualifies a saver to enter the drawing for the prize which happens 10 times per month, one per quarter, and one per year, with reward amounts increasing as the time-period lengthens. Lagniappe also requires that no more than two withdrawals occur within the year to be qualified for the annual prize drawing.
These programs are thought provoking as alternative methods to enhancing the savings patterns of Americans. At Southern, we are exploring this and other similar programs, including those provided by companies such as Walmart that incentivize savings, and we will continue to work with policy makers to identify unique ways that we can both figuratively and literally, keep our eyes on the (savings) prize.
[i]“Financial shockrefers to any expense or loss of income that households do not plan for when budgeting, regardless of the extent to which the shock may harm families financially.”
[ii]Lagniappe is French for a little something extra.