Everybody loves to be a winner. Just like parents have been known to dangle money in front of their kids to motivate them to get good grades, once President Obama signs the bill passed late last year, banks and credit unions can go the full monty with prized-linked savings accounts to entice people to save, particularly those of low to moderate income.
Already there are seven states that participate in the Save to Win program. It’s working. Since the first program in Michigan in 2009, to date, more than 14,600 people have won $1.59 million in prize money. As of early this year, more than 70,000 have saved $40 million.
While a recent America Saves Week survey showed some improvement on nearly a dozen savings indicators, like the fact that 71% of those polled said they are spending less than their income and saving the difference, compared to 68%, and those who said they are saving at least 5% of their income grew from 47 to 52%. However, nobody is ready to say our saving strategy is where it should and could be.
The results the Save to Win program has achieved are notable, given that one in four Americans has no savings, and the inadequate funds most people have set aside for retirement has experts talking about the retirement savings crisis in this country.
So are prized-linked savings accounts the answer? No doubt people like games and winning. Last year Americans reportedly spent more than $70 billion on lotto tickets. Financial institutions are making an effort to attract new business. While the rules vary, savers are eligible for monthly prizes that can range from $25-$100, quarterly $500-$5,000 and an annual or grand prize of $5,000 or $10,000.
Band aid on a big problem?
"A true wealth builder or saver does not need any motivation to save, other than they know that they should save," says Steve Repak, a certified financial planner and author of Dollars & Uncommon Sense: Basic Training for Your Money. On the other hand, he says, offering prize-linked savings accounts can motivate non-savers to save only if the prize is large enough to compensate the inconvenience for the non-saver to open an account.
"I just finished participating in Military Saves at Rose Barracks in Vilseck, Germany and spoke to the representatives of financial institutions that were located on post. They found that when the prize was lower, for example $25 for opening an account, even though it was free money, not a lot of people took advantage of that. When the prize was increased to $50, they were able to get more people to participate," says Repak.
Joseph Ritter, Jr., a certified financial planner with Zacchaeus Financial Counseling, says if he had to choose between $25 a month on the lottery or $25 per month on a prize-linked savings account he would go for the PLS account. "However, in this simple comparison, what you see is that there is no real lifestyle change taking place. At best PLS offers only a marginal difference in a person’s psychological approach to money, spending and saving, which means that there will be little socioeconomic improvement on a large scale," he says.
While the magic of growing a savings account will be enough for some to want to change their money habits for the better, many others, will still go on with business as usual, he says. "To achieve lasting changes, an individual approach is required, not mass marketing. Unfortunately, banks stand to benefit the most from the significant branding opportunity and from making money on the increased deposits."
How to get lasting change
"The trick is to first get people to understand that living day-by-day when you can save, is risky," says Toby Bloom, an income protection specialist.
He says simplicity is key, "People can start out putting money in a jar for a rainy day. As time goes on, that jar will fill up and they can start a savings account."
Those small steps can lead to a habit of saving. "Saving money is solely a matter of habit. Think about something that took you a really long time to learn. At first, it was difficult and you had to devote a lot of mental energy to it. But as you grew comfortable, it became much easier – almost habitual. In truth, the habit of saving can be made as fascinating as the habit of spending, but not until it has become a regular, well grounded, systematic habit," says Kevin Cahill, president and founder of Canadian Legacy Builder.
People have to be ready to do the work. "Saving requires more force of character than most people have developed, for the reason that saving means self-denial and sacrifice of amusements and pleasure in scores of different ways," says Cahill.
To get people to start saving, "we need to focus less on the how and more on the why," says Brad Pagano, co-founder and managing director for the San Diego Financial Literacy Center. "We have to create dynamic educational opportunities that start at a younger age to teach our generations about the importance of having a plan and what that plan can help you achieve."
The bottom line -- saving for savings sake often isn’t enough. It’s about goals. Says Bruce Sanders, a consumer psychologist, "Surprisingly, the research finds that, in general, people with one important savings goal will deposit more."