If you think saving money is hard, try not saving money.
Among U.S. households, almost half have saved so little that they’re “financially fragile,” according to the Brookings Institution, a think tank in Washington. Even a common expense like $2,000 for an unanticipated auto repair or a surprise medical bill can have dramatic consequences for people in such households. Suddenly running short of cash can send them into vicious debt cycles, ruin their credit and in some cases even cost them their homes.
The problem is, it’s difficult to get people to save money just by telling them they should.
“Starting out and still paying off student loans for college … I didn’t have like a thousand dollars that I could set aside,” says Samantha Lazarowicz, a 27-year-old living near Midland, Michigan, recalling her first years after graduation. Like many people, she needed an extra incentive — such as, say, a chance at a prize.
Poorer Americans spend more on state lotteries than others do, and it’s easy to see the allure. Along with satisfying the urge to gamble, playing a lottery ties into hope that one’s dreams might become affordable realities.
By contrast, it’s difficult to envision the benefits of saving enough money to cover emergencies. Who daydreams of paying to repair a leaky roof?
In the past decade, financial institutions, legislators and nonprofit groups around the country have used the thrill of a lottery to encourage the financially fragile to put some cash away: prize-linked savings accounts. They work just like regular savings accounts, except for one feature: For every deposit of at least a certain amount, typically around $25, the account holder gets one entry in a raffle for prizes ranging from $25 to $25,000.
Having those chances to win gets people to save, including those who haven’t in the past and who may be most in need of a cash reserve.
“I actually just started it because it was a way that I could open it with just $25,” Lazarowicz says of her prize-linked account. It motivated her to start saving, albeit by making just small deposits.
For savers and non-savers alike
In the six years since FinancialEdge Community Credit Union in Bay City, Michigan, where Lazarowicz has her account, began a prize-linked savings program, the average balance in those accounts has grown to about $5,000, says Pam Swope, the credit union’s director of marketing and compliance.
“The value added to our members, whom this program was designed to benefit, seemed evident in those numbers” when the credit union reviewed the efforts last year, Swope says.
For participants who have never saved before, the value of these accounts is very clear indeed. In the few states where they were offered starting in 2009, these programs led to the creation of $94 million in savings by 2013, according to the D2D fund, a Boston nonprofit group that helped design and launch the Michigan program, called “Save to Win.”
And those who are already saving sometimes save even more.
“You can put $250 a month in there and have 10 chances to win,” says Gail Miller, a retiree from Winston-Salem, North Carolina, who has a prize-linked savings account.
Miller’s credit union gives account-holders like her one raffle ticket for every $25 contributed, up to a maximum of 10, ensuring that every participant can feel like they have a relatively fair chance.
“I make sure that I put that much in each month — and I would not have put that much in just a savings account,” Miller says.
The catch? Murky legal status
For many who might like to open a prize-linked savings account, there’s just one snare: The legality of such accounts is open to question in most states. In fact, they were technically illegal at the federal level until December 2014, although some, including the FinancialEdge program, appeared in states such as Michigan in 2009.
To date, only 12 states have laws specifically legalizing “savings promotion raffles,” the more common legal description for such accounts, according to the National Conference of State Legislatures. Legislation is pending in 13 other states. In many legislatures, the bills have received broad support. Even so, winning passage, where it has occurred, has taken considerable time and effort.
“There was a lot of communication in Connecticut, back and forth between us and our Department of Consumer Protection,” says Bruce Adams, the state banking department’s general counsel. That state made prize-linked saving legal in June 2013. “We had at least a year for the Legislature to marinate on the concepts,” Adams says.
The issue is still stewing in other states, despite the recent change in federal law. In Kentucky, for example, negotiations between the Kentucky Bankers Association and the state attorney general’s office remain unresolved, according to Debra Stamper, general counsel and executive vice president of the banking group. She says legal action may be the next step.
In any case, it will probably be some time before prize-linked accounts become legal in Kentucky or other states where their status isn’t clear or they remain banned.
Be a winner either way
Even if you can’t win a prize, start saving anyway. Open an account if you don’t have one and put in even just small amounts of money regularly, the way Lazarowicz and Miller do. Just a few dollars a month adds up.
As Lazarowicz says, “$25 is maybe no coffee for a week.” And it’s much better than nothing.
Image via iStock.