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Growing up, my parents and grandparents loved to play the lottery. Specifically, the would play the Powerball when it got big, which was anything over $20 million. At the dinner table, we would talk about what we would do with the money and how winning would unleash all sorts of happiness. Having previously written about the lottery, I know that in reality, happiness usually does not follow. However, the $1s spent on the Powerball tickets definitely provided us entertainment value.
Prize-Linked Savings Accounts (PLSA)
Recently, I came across something that peaked my interest, prized-linked savings accounts (PLSA). A PLSA is a savings account with a lottery component attached to it.
Instead of earning the average savings account rate, a paltry 0.06%, you may be tempted to park your money into this interest-free account. That is because by doing so, you enter into a chance to win up to $5,000 quarterly.
Research has shown that these accounts are attractive to consumers who are drawn to the lottery’s large prizes. It’s also a great way to encourage savings, since the deposited money is never lost, unlike that of an actual lottery ticket. Many people look at this as a “no-loss lottery”.
“A big challenge is that saving is not much fun. For a lot of us, it’s the antithesis of fun,” says Timothy Flacke, executive director of Commonwealth, who helped design the nation’s first large-scale prize-linked savings account project, Save to Win, in Michigan.
Harvard Research
Save to Win follows the research of Peter Tufano from Harvard Business School. That research revealed that 56% of participants were non-savers before the program began. Save to Win is open to anyone 18 or older and has been especially popular with lower-income individuals who struggle to save.
Now here is one of the kickers with Save to Win. The more money that you save, the greater the chance that you have to win. Account holders are able to enter once monthly and once quarterly for every $25 that they save per month, up to $250. The monthly drawing offers smaller prizes of $25 or $50, which is dependent on the state that you live in. Meanwhile, the quarterly drawing offers a grand prize of up to $5,000.
I do like the thought of contributing $250 a month in order to potentially win $5,000.
So, should you run out to the bank and sign up for a prize-linked savings account ASAP?
Maybe. However, first you should know that prize-linked accounts are only available in a little more than half of U.S. states. That is due to gambling and lottery regulations. Below, you will see the 26 states that allow prize-linked savings accounts. If your state hasn’t authorized these types of accounts, unfortunately, you are not able to participate.
States Where Available
Currently the list of states include: Arizona, Arkansas, Connecticut, Delaware, Illinois, Indiana, Kansas, Louisiana, Maine, Maryland, Massachusetts, Michigan, Minnesota, Missouri, Montana, Nebraska, New Jersey, New York, North Carolina, Oregon, Rhode Island, South Carolina, Texas, Virginia, and Washington. Additional legislation is currently pending in other states.
Next, you should never count on the lottery, or for this matter, the prize-linked savings accounts, to substitute for a good financial plan. Even if you win money from these types of accounts, you’re more likely to earn superior returns investing your money into the stock market than you would through a prize-linked savings accounts.
The Takeaways
If you like the thrill of a no-loss lottery, this may hit the spot for you. There are better investment vehicles available. However, this type of account definitely beats the alternative of playing the lottery each week.
Ah wow the power of incentives and potential winnings – so interesting.
Thanks for sharing!
Glad you enjoyed it Chris!!! It’s amazing what psychology says 🙂
Rob, My first reaction was, this is just a ridiculous concept. But after reviewing the post again and pondering it, I have changed my mind. If it is a vehicle that encourages people to save who would otherwise not do so, it’s a good thing. Money set aside in an account earning virtually nothing is still better than money unnecessarily spent. Tom
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Hahaha…you and I think a ton alike. I couldn’t believe that people actually did this but as I began to think, if this encourages people to save, this is wonderful 🙂
Very interesting, using their own psychology ‘against’ them. We play the lottery also when it gets really high, but talk about ‘living off the interest’ and donating a substantial percentage. In reality, who knows? Some winners are able to avoid ruining themselves… I would bet that proportion would be higher in this group since we already know and (try to) live the right ideas. I guess we just need ~30 of us to win a jackpot to create a statistically sound sample. 🙂
This seems like a really good thing, though note that this is not a savings account but some type of flexible(?) CD with penalties for any withdrawal: “Account holders are permitted to make one withdrawal during the 12-month certificate term for a $25 fee and must leave at least $25 in the account to keep it open. If a second withdrawal occurs, the account will be closed. ”
Looks like you can deposit arbitrarily, but I’m not a banker so I don’t know if that goes into the existing CD and renews at the same time…or if that means each deposit creates a new 12-month CD which auto-renews on it’s own cycle. The second option would seem to be better since that would increase the chances of a CD being in the grace period when money is needed, allowing for a withdrawal without penalty. Otherwise this feels a bit predatory, since most of the target market will need cash at some point and suffer a $25 penalty (or more) to get it out.
I do think there is a right market for this, but this would be better done in concert with some sound financial advice. Since this seems to be done via Credit Unions, there is a *bit* of hope there.
Thanks for sharing Mikes!!! I would love to one of us win the lottery and then maybe they can spread it around to thirty of us to partake in the experiment 🙂 I’d definitely would love to see the results of that 🙂
I have never bought any lottery ticket. My family is also not big on lottery either. I’m not sure why, but I think I just don’t want to spend the money not knowing for sure if I can recoup it. I think I need to be more adventurous to get rich!
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Thanks for sharing Ms. FAF!!! Sounds like you have spent your money very wisely. I don’t know anyone that has made money off of lottery tickets. I normally see them lying scratched off on the ground somewhere…
It seams pretty gimmicky but with interest rates so low it might not be a bad idea as long as your money is safe. Hey if it help people to save money then it’s probably a good idea. It’s kind of like someone that typically spends their whole paycheck even though their bills may only require half of their income. If they decide to buy a house, even if it’s not a great deal, they are still building equity instead of blowing the money. Of course if they could save and invest the money it would probably be even better but some people need to see something tangible in return.
Great analogy Bob!!! I definitely agree that savings is savings however you do it, even if you need to be tricked into at times 🙂
Good concept because it forces people whom would otherwise not save as much to have an incentive to do so. We need more rewards like this. I’m not a lottery person, but if I were I’d probably sign-up for this to boost savings. At least you have a better chance than one out of a gazillion to win 🙂
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I like the odds of this versus what the real lottery pays out 🙂
I’ve never used a prize-linked savings account, but my wife was using SaveUp.com (before it went down for reconstruction…it will be back up soon). SaveUp allows you to link to your existing accounts (savings, debts, checking, etc.) and gives you points to reward you for paying down debt and saving money. Those points can be used to win various prizes, up to $2 million. Similar concept but you can still earn decent interest on your savings account.
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Thanks for sharing Gary!! I’ll have to check it out and see what it’s all about 🙂
Hey Rob!
My ENTIRE family has always bought the lottery even before I was born. They are still buying the lottery [goodness, I don’t want to know how much they spent on it]… and they tell me that they will become rich from it one day… *HUGE SIGH*
I personally was never a lottery fan, and it doesn’t spark my interest. I rather throw my money in penny stocks than to play the lottery lol. But overall, this concept is a good way to get people to save. An interesting one too… I’ve never heard of it!
It seems to me that anything that is tied to winning something or incentive base will capture people’s attention… thanks for sharing!
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Hahaha…I love the penny stocks line 🙂 There is probably a better chance that those pan out than a lottery ticket 🙂
I have never heard of a PLSA, interesting concept. I don’t think it is for me, but can understand the draw. Hopefully it can help people who do not save or use cash in other ways, to actually invest, save, and potentially win a prize.
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I’m right there with you. I wasn’t super familiar with them before I started to study up on them. Seems like an interesting concept if you want to play the lottery 🙂
This is something I had never heard of so thanks for the article and details, Rob! Appreciate it.
Glad you enjoyed it Mike!!!
I have never had a prize linked savings account. But even if I had the option, I wouldn’t invest in one, because you are exposing yourself to major inflation for the low probability of winning a prize. I would rather invest in a high yield savings account where I am guaranteed some interest. Or even better, invest in a low fee index fund in a brokerage account.
Inflation is a sneaky beast. It eats your money over time. The lottery is not the road to financial wealth. Consistent savings is the guaranteed way to wealth that requires no faith in luck.
Great points MissSaraBee!!! You are absolutely right about how sneaky inflation is over time. It will eat up your earnings 🙁