How lottery tickets are helping people save money

By Justin Boyle

Imagine this: You walk into a credit union to open a savings account, and the teller responds by selling you lottery tickets.

Odd as it may seem, this type of scenario plays out all over the world. They're called prize-linked savings accounts, and a few states in the U.S. are making use of them to give residents a little extra incentive to put money away for a rainy day.

A long history

Prize-linked savings accounts might seem like an innovative concept, fresh off the desk of some ground-breaking personal finance start-up founder, but the truth is that they've been around longer than the United States itself. In 1694, to help defray debt incurred during the Nine Years' War, officials in England instituted a public investment program that offered substantial lottery prizes to around 2.5 percent of investors (and an APY of 6.15 for 16 years, believe it or not).

Modern savings lotteries tend to offer a less enticing ROI, but they certainly haven't disappeared in the centuries since that first example. A 2002 survey showed prize-linked savings and investment instruments active in Spain, Germany, Sweden, Japan, Mexico, the United Kingdom, Kenya, Pakistan, Argentina and other nations at various times since 1990.

Prize-linked savings in the U.S.

The first of the modern stateside savings lotteries hit the personal finance market in 2009, when a group of eight Michigan credit unions launched the "Save to Win" program. Members open a 12-month share certificate at a participating credit union and earn an entry in a monthly drawing with every $25 they deposit.

The program showed strong results, and shortly thereafter other states began emending statutes on gambling and credit union regulations to make room for similar programs. As of 2013, six additional states -- Maine, Maryland, Rhode Island, North Carolina, Nebraska and Washington -- had cleared the way for lottery and raffle incentives on savings accounts.

Although the best savings account rates are typically offered by less exciting investment instruments, the experience of having money in store for emergencies can easily serve as a gateway to deeper curiosity about everyday savings. Once new savers get some experience with healthy financial habits, they may be more likely to further explore the world of traditional and online savings accounts.

One big obstacle

Although a 2013 report shows these programs making great strides toward savings growth among financially underserved segments of society, some government officials remain far from enthusiastic about their widespread implementation.

One obstacle to these game-infused savings products is a certain group of moneymaking juggernauts who feel threatened by them: state lottery boards. U.S. state lottery revenue pulls in an estimated total profit of $18 billion across the 47 jurisdictions that sanction the various number-drawing and scratch-off games.

Prize-linked savings accounts could potentially compete with state lotteries, but the Michigan Lottery hasn't been hurt too badly by Save to Win. Lottery ticket sales in the state actually rose, by about $36 million, between 2009 and 2013.

Do they really help?

Another potential downside comes from the very thing that makes these accounts so attractive in the first place: their emphasis on a large-scale, long-odds return, which might obscure the lessons about smart personal finance that lie at the heart of the program. After all, reducing your debt requires gradual and deliberate action, not random chance and a giant lump sum.

Data collected by the Doorways to Dreams fund, however, seems to show that the accounts can be habit-forming. The average participant in Save to Win has added 34 percent to his or her account balance each year since making that first deposit, and more than half of active account holders have participated continuously since the first year of the program.

Admittedly, prize-linked savings accounts might rely on something of a gimmick to encourage that first step into savings, but it's not a whole lot different from the classic practice of banks giving out toasters or other deal-sweeteners to new customers. Combining a prize-linked account with some complementary wisdom about the power of saving might just bring some financial savvy to those who need it most.