You Have to Save to Win

January 12, 2012

Recently, a single mother I know who supports herself and kids on about $15,000 a year told me she planned on giving up cigarettes for the new year. "I'm going to use the money I would have spent on cigarettes to buy lottery tickets," she said. It wasn't a position I was prepared to argue against. In fact her comment offered insight into something I had long wondered about: why folks who have so little will spend meaningful sums of money on what seems like a long shot. It's because they see a lottery prize as their ticket to the big leagues. Maybe winning lottery money won't jettison them into the top 1%; but even getting in among the top 50% is a worthy pursuit for the asset poor.

It's a situation that has caught the attention of some credit unions, with growing numbers offering customers chances to win cash prizes for making deposits into savings accounts. It's a phenomenon known as prized-linked savings accounts. Here's how the Doorways to Dreams Fund explained it in a recent report:

"In hard times - perhaps especially in hard times - people need to be entertained, to have moments of excitement and periods of escape from the economic realities they face....This is the secret of Save to Win: it is fun while helping families strengthen their financial health."

Doorways to Dream (D2D) is a Massachusetts-based non-profit that promotes savings among America's poor. It describes itself as an "incubator" of new ideas that came out of a project of Harvard University and remains allied with university personnel. (Click here for previous coverage of D2D.)

Working with members of the Michigan Credit Union League, D2D held its first "raffle" in 2009 with participation from a handful credit unions; today 42 credit unions participate. Consumers qualify for prize drawings with deposits to 1-year share certificate accounts (the CU version of certificates of deposit.). Minimum deposits are just $25; and customers can make up to 10 rafle-qualifying deposits each month.

The program, which targets low- to moderate-income, has been such a success that advocates have convinced policymakers in five states to enact legislation specifically authorizing raffles tied to savings accounts. (For a variety of legal reasons these programs are referred to as raffles, not lotteries.)

D2D details initial successes in the program in a report published this past fall - A Win for All: The Growth of Save to Win in Michigan - which is available for downloading. Here are some highlights:

• Low- to moderate-income consumers at 8 cerdit unions saved, on average, $634 the first year of the program (2009);
• The poorest of the poor (the asset poor) had saved, on average, $390 in year one;
• By the second year, members of 32 credit unions were involved and the average yearly deposit across all asset categories was $1,268.
• Participating members added 11,000 new CD accounts to their books in 2010;
• Better than half (54%) of consumers who opened accounts for 2009 D2D raffles continued making deposits to those accounts in 2010.

50 million American households are considered "unbanked" - they have no relationships with federally insured financial institutions