Saturday, December 04, 2010

Encourage Saving with the Lottery

Two years ago I listed the top five things I've learned from financial guru and radio talk show host Dave Ramsey. One of the lessons for future planning that really stuck with me was having 3-6 months of expenses as an emergency if (when) things go wrong. The most recent episode of the already recommended Freakonomics Radio recently brought to my attention just how many Americans don't have anything close to that. They cited an international survey which asked people if they could come up with $2,000 in 30 days from either savings, borrowing, friends or family. Here are the pitiful results:

I place most of the blame on our overemphasis on the present and poor planning for the future. So it's not just an American problem, it's a human problem. So what can we do about it? We could mandate savings, but I'm always uncomfortable forcing financial decisions on others. So instead, I suggest we nudge people towards a more stable budget. Entrepreneur turned philanthropist Bill Gates suggests subsidizing micro-banking to the poorest, but that can have mixed results. Instead, the folks at Freakonomics suggest harnessing one of our seemingly least rational obsessions, the lottery.

Last year America "spent more than $58 billion on lottery tickets, or roughly $200 per person" on lottery tickets. The likelihood of the lottery having a positive financial impact is practically zero, even if you win. That is, unless, you don't lose the money you spend on the lottery. What the folks at Freakonomics are suggesting in this podcast is a Prize-Linked Savings Plan. Like a normal bank, it takes deposits and pays back interest. The only difference is that it takes some of that interest from each account, combines it, and regularly pays out huge cash prizes. It's a savings account and a lottery. The best part is those who are most likely to pay a larger part of their income in the lottery, the poor, need a savings account the most.

So if this idea is so great, why haven't we heard it before? The competition won't allow it. That's because the competition is government run lotteries. And the government not only makes the lottery, it makes the rules. But don't fret, via some loophole, a league of Michigan credit unions have created one. So if you have a hard time saving, bet it all.

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