Build up your savings—and get a chance to win a lottery jackpot

lottery-savingsEconomists and anti-poverty advocates have long warned that playing the lottery can be a money trap for low-income Americans, given the minuscule odds of winning. As any prudent financial advisor would say, that money would better serve a person if it were saved instead — whether for long-term goals like retirement or for a rainy day fund to provide a vital cushion during unforeseen emergencies.

Yet a typical American household still spends an average of $540 yearly on lottery tickets; the mania around multi-million jackpots makes the lure of lotteries even more obvious. Why wouldn’t playing the lottery appeal to human psychology? The odds of winning big may be nearly zero, but the odds of winning big is actually zero if one never buys a ticket. For the poorest Americans — who would benefit the most from saving but also have the least income to save in the first place — the lottery may also rationally seem like the only way they would ever attain significant sums of money all at once.

An intriguing new initiative is trying to tap into that draw of the lottery to flip the way it affects people’s savings rate. The New York Times explains here:

In America, banks can’t run raffles or lotteries. They can run sweepstakes. The difference is a sweepstakes can’t require entrants to put in money — people must be able to enter by simply sending in their names. That effectively kills the idea for banks.

D2D, which is short for Doorways to Dreams, works to change federal and state laws to allow banks to offer prize-linked savings. But it is also collaborating with institutions that can do this right now: credit unions. In some states, credit unions can hold raffles.

For each deposit of $25, savers got normal interest, plus one entry to the annual grand prize and monthly smaller prizes of between $25 and $100. More deposits meant more chances to win, up to $250 – 10 chances — a month.

It may soon be possible to get even closer to the lottery. Doorways to Dream is developing a savings card (pdf) that can be sold right next to lottery tickets in the corner store. For $15, you buy a scratch-off or big jackpot card — the difference is that you are saving that $15, not spending it. Smith-Ramani said that the group has spoken to several states and is in “pretty advanced conversation” with one state — they hope to have a pilot in 2015.

Putting lottery-style savings cards into corner stores in poor neighborhoods, where there are often no banks, could produce the large-scale consumer demand needed for big jackpots. In the meantime, Save to Win programs are spreading. Michigan’s program is considered a success, and now it has imitators: Washington, Nebraska and North Carolina have started Save to Win-style programs.

Read the full article here: “Playing the Odds on Saving,” The New York Times (2014).