The Fun Way to Get Americans to Save More

If you would struggle to come up with $400 in an emergency, but you also buy hundreds of dollars in scratch-off and lottery tickets each year -- you're hardly alone.

Despite the losing odds, it's the poorest Americans that are most likely to play the lottery, perhaps because they feel like they're "buying a dream" out of poverty.

In some ways, that temporary thrill is not much different than the intangible benefits and happiness that people derive from spending on movies, travel, books or other entertainment. But the cruel irony is, playing the lottery entails far steeper costs, averaging a negative 47 percent return, and by appealing to those who can least afford it, it's a behavior that leads to a vicious cycle.

Now, there's an ingenious way credit unions, banks and even Wal-Mart Stores (NYSE: WMT) are harnessing the same allure of the lottery to instead encourage low-income populations to start a regular habit of saving. Essentially, they've turned playing the lottery from a vice into a virtue, creating a version of the game in which there are only winners and no losers.

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While higher income savers might use mutual funds, individual retirement accounts and stock brokerage accounts to grow their savings, these prize-linked savings products appeal to a community of savers that are often don't even have a standard bank account.

And the habits being built could open the door to investing that these former non-savers would not consider opening before.

The programs, known as prize-linked savings, typically work like this: A customer puts a small amount of money in a savings account, certificate of deposit, or in Walmart's case -- a "vault" account on its prepaid card. Participants then are entered into recurring raffles to win cash prizes, often on a monthly, quarterly or yearly basis.

One of the largest programs, Save to Win, offers account holders a chance to win prizes ranging from $25 each month, up to $5,000 in quarterly drawings. Consumers can participate by opening a 12-month share certificate at a participating credit union. Every $25 deposit earns an entry into the drawings, up to 10 entries a month.

Regardless of whether you win a prize, you do not lose your deposits and your account continues to accrue interest (albeit meager, given today's low interest rates).

Commonwealth, a Boston-based firm focused on strengthening opportunities for the poor, piloted the Save to Win program at credit unions in Michigan in 2009. Since then, the program has spread to 13 states and more than 75,000 accounts have been opened. Now, the average account holds $2,429.

More than 80 percent of the participants are considered "financially vulnerable" -- meaning they are not regular savers, are asset poor, of low to moderate income, had high debt or had no emergency savings.

Timothy Flacke, Commonwealth's executive director, considers those numbers a major success, especially given the worrisome findings of a 2016 Federal Reserve Board survey, which shows 44 percent of Americans would struggle to come up with $400 in an emergency.

Meanwhile, approximately 9 million, or 7 percent of all U.S. households, were unbanked in 2015, according to a survey by the Federal Deposit Insurance Corporation. About 57 percent of those households said they did not believe they had enough money to keep in an account.

"This is really a national crisis and something we all have a stake in figuring out," Flacke said.

Walmart worked with Commonwealth and Green Dot, a financial technology company, to launch its own version of a prize-linked savings program in August 2016. To participate, users can load money on to a prepaid debit card, the Walmart MoneyCard, and then transfer funds to what's known as the "MoneyCard Vault." Each dollar in the vault, up to $500, equals one entry in a national drawing. One $1,000 prize and 499 $25 prizes are awarded each month.

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The vault is considered a place to store funds that are not immediately available to spend. That said, the funds remain relatively liquid, with customers able to transfer money in and out of the vault up to 20 times a day. The card is not without the typical fees associated with prepaid cards: Buying a card costs $1, and there's a $5 monthly fee for balances less than $1,000. There are also ATM fees and fees for reloading the card with cash.

Through June 2017, about 175,000 consumers have used the vault feature, and about $135,000 in prizes were distributed. The average account balances are lower than what Commonwealth has seen through the credit union programs, ranging in the hundreds of dollars instead of the thousands, Flacke said.

"We're really talking about managing the ups and down of life in a better way," he says. "Instead of taking out a payday loan if you're a little short, now you have you a couple hundred bucks in a reserve that you can draw on. For an awful lot of people in this country, that makes a huge difference."

Hardly a new invention, prize-linked savings programs have been popular in the United Kingdom and South Africa, but they're still relatively new in the United States, where regulations have often outlawed private lotteries. Economic historian Anne Murphy has even traced prize-linked savings back to 1694, when the English government created the "Million Adventure" to pay off debt from the Nine Years War.

In the United States, Peter Tufano, formerly of Harvard Business School and now dean of the Saïd Business School at the University of Oxford, was instrumental in documenting the benefits of some of these programs and working with lawmakers on new legislation.

The American Savings Promotion Act, signed by President Obama in December 2014, removed federal barriers, and 26 states have enacted similar legislation, authorizing prize-linked savings promotion raffles. Montana, Alabama and Delaware passed laws in May.

Del-One Federal Credit Union will be the first financial institution to run a prize-linked savings program in Delaware this fall. Del-One president and chief executive, Dion Williams describes the product not only as a win for customers, but also a powerful marketing tool to attract new customers.

"Credit unions in general target middle America and the underbanked and unbanked -- this program suits that audience well. What we're hoping, though, is to really reach out to people who do not have the habit of saving," he said.

And for other savings programs in general, it's important to weigh the tradeoffs between saving for a rainy day, and paying down debt -- particularly on high-interest credit cards.

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"I can see that paying off an 18 percent credit card is a better return than a quarter-point savings account," Williams said. "However, no matter how much debt a person has, I'd argue a person should have at least $1,000 in an emergency fund. Something to draw upon is better than nothing."

Annalyn Kurtz is a business journalist whose work has also appeared in Fortune, the New York Times and CNNMoney. She holds an MBA from Columbia Business School and a master's in journalism from Columbia Graduate School of Journalism. Follow her on Twitter @annalynkurtz.