Savings accounts: the cornerstone of any nutritious financial plan.
Unfortunately, even with the help of a painful Pulp Fiction reference, savings accounts are hard to get excited about. Everyone knows they should save, but still we drag our feet. And the people who are the most exposed to risk, namely those with low incomes, tend to save the least.
So how can you improve savings rates? The answer, it appears, is gambling -- a very special type of gambling.
Prize-linked savings accounts
Prize-linked savings accounts are just like regular savings accounts, except that instead of earning interest you get the chance to earn larger amounts of money as prizes. In other words, these accounts take all the interest that would be paid out to individuals and raffle it off randomly to account-holders instead. Typically, the more you save, the more "raffle tickets" you accrue, and the greater your chances of winning.
According to the Bipartisan Policy Institute, they're still only available on a limited basis here in the United States, but they're used to great success around the world. In the U.K., for example, some estimates put participation in the nation's Premium Bond Program at between 22% and 40% of citizens.
If it all sounds a little reminiscent of the lottery, that's because it is. The only difference is that, at the end of the day, you're guaranteed not to lose any money in a prize-linked account. Instead, your money is saved.
Okay, but what's so great about them?
A fascinating study on a South African bank found that prize-linked accounts might actually be a nice replacement for real-life gambling, which is both highly ineffective as a long-term financial strategy and which is also disproportionately favored by the poor. In other words, these accounts can capture the attention of a population most likely not to have savings: people who have low incomes and who play the lotto.
These accounts do this by appealing to people who feel traditional savings accounts have little to offer them. After all, a modest savings account with a tiny interest rate isn't going to make you rich anytime soon, while a few dollars here and there on a lottery ticket seems a small price to pay for a potentially big payoff.
But linking savings to payoffs, even those with a low probability of happening, works. Looking at bank employees who opened a prize-linked account, the researchers found that the new account holders increased their savings by 1% of income. It might not sound like much until you consider that this also represented a 38% increase in average savings.
And those incremental changes can -- as any avid saver will tell you -- add up over time.
The other cool thing about prize-linked accounts is that they can inspire other people to save. The researchers found that bank branches that had a big winner experienced nearly 12% growth in new deposits relative to other branches in the month after the win.
In other words, winners generate a buzz that encourages more participation -- and higher savings overall.
Why don't we have more of these?
Of course, in the absence of rules there's a risk of unscrupulous payout schemes that save the bank the trouble of paying a market rate. The other issue, of course, is a lack of a guaranteed interest payment, which big-money savers are probably more concerned about.
But if that doesn't really matter to an individual saver, at least not at first, then these types of products could be a great way to persuade people to save more money. The best part is that, instead of making it a dreary or paternalistic type of task, prize-linked accounts can actually make it fun.
Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.
More from The Motley Fool
3 Top Oil Stocks to Buy Right Now
Oil prices are at multiyear highs, but these three companies are set to profit whether they go higher or not. Here's why they're worth buying now.
4 Things to Do Before Tax Day
Doing this will give you a much easier time completing your tax returns.
No Holiday Reprieve for 2 of the Biggest Retail Train Wrecks
Most department store chains have posted surprisingly strong results for the 2017 holiday season. However, these perennial laggards couldn't capitalize on the uptick in consumer spending.