About Prize-Linked Savings Accounts

If you enjoy playing the lottery, you’re not alone. About half of all adults in the United States have played the lottery, and the average player throws about $600 a year on the long odds that they might hit it big.

For the vast, vast majority of people who play the lottery, that’s money down the drain. Right now, your chances to win Powerball’s Jackpot are 1 in 292 million. Even your odds of winning Powerball’s lowest prize, a $4 payout, are 1 in 38.2, on a $2 ticket. So, on average, you need to spend $76.40 to win that $4 prize.

Overall, state lotteries offer a negative return of $0.52 for every dollar spent. Spend $600 on state lottery tickets, and you’re likely to end up $288 in the hole.

Not a great investment strategy.

But of course, most of us know this, and still, we choose to play. Research shows that somehow, we believe that even though the odds are stacked against us, we’re going to beat them.

At the same time, many Americans aren’t saving nearly enough money. A study last year found that 40% of Americans don’t have enough savings to cover an unexpected $400 expense.

A new type of savings account—called a prize-linked savings account or PLS—takes advantage of our eternal optimism, while helping to boost your financial health. It combines savings money with the chance to win prizes.

How Prize-Linked Savings Accounts Work

The specifics of a prize-linked savings account can vary from account to account. But the basic idea of a prize-linked savings account is that the more money you deposit into your savings account, the more chances you have to win prizes—cash prizes.

Take the recently launched Big Prize Savings account from American First Credit Union in California. Under the program, every $25 in your average balance—once you’ve reached the $500 minimum for eligibility—earns you a shot at monthly giveaways of $1,000, quarterly giveaways of $10,000 and an annual drawing of $50,000.

The best part is that even if you’re not a lucky winner, you still win by building your savings account balance.

Let’s imagine you’re a lottery player who spends the average $600 per year on tickets. That’s just under $12 per week. Now, imagine if you took your $12 every week, and put it into a prize-linked savings account. After 5 years, you’d have almost $2,936 in your savings account thanks to the compound interest on your savings rate, instead of having donated it to your state lottery fund.¹

You’d have also earned more than 3,400 chances to win prizes valued between $1,000 and $50,000. American First has a calculator that lets you do the math for how much you think you could save and how many chances you’d earn at winning.

The History of Prize-Linked Savings Programs

When it comes to prize-linked savings accounts, America is a bit late to the party. A study from the Harvard Business School mentioned that 20 countries beat the U.S. to the punch. Sometimes, by quite a while.

The first record of something like a prize-linked savings account was called the “Million Adventure,” and launched in 1694 to finance England’s fight in the Nine Years’ War against France. A £10 investment earned accountholders a 10-year return of 6.15%, along with a chance to win prizes of between £10 and £1,000 per year for the next 16 years. That’s a value of around $3 million in today’s dollars.

Instead of financing wars against Louis XIV, more recent prize-linked savings accounts have been targeted at promoting healthy savings habits. Starting as early as 1918, prize-linked savings accounts in countries like Sweden, the United Kingdom, Spain, New Zealand and Germany (among others) have been shown to promote savings in the citizens who need it the most.

What took the U.S. so long? The threat of legal trouble. In most states, it’s illegal for anyone but a state to run anything that might be deemed “a lottery.”

When early pilot prize-linked savings accounts were launched in the U.S. in 2007, researchers from the Harvard Business School collaborated closely with the credit unions launching the savings promotion products. What the collaboration found was encouraging. The research showed that prize-linked savings accounts are the most appealing to people who don’t have a regular savings plan as well as to people who regularly participate in some kind of gambling or lottery play.

In short, the research showed that prize-linked savings accounts are great tools for encouraging people to establish healthy financial well-being habits as a substitute for financially unhealthy gambling habits.

After the launch and success of early programs in Indiana and Michigan, states across the country changed laws to specifically allow prize-linked savings accounts to be offered by financial institutions in the state. Currently, around 30 states allow credit unions and banks to offer prize-linked savings accounts.

Who Can Open a Prize-Linked Savings Account?

If you live in one of the 30-plus states that now allow prize-linked savings accounts, you might have a financial institution near you where you can start saving.

While most prize-linked savings accounts are targeted at local customers, a few institutions make accounts open to potential savers around the country. American First’s Big Prize Savings is one such PLS.

The American First Credit Union offers accounts to individuals who live, work, worship or attend school in Orange County, California, or in the 16 qualified cities in southern California, or who may work at one of our national affinity group or are members of the Children’s Museum of La Habra.

Who Should Open a Prize-Linked Savings Account?

If you’re currently spending money on lottery tickets or thinking about starting a savings account, or you just enjoy the possibility of winning cash prizes, prize-linked savings can be a good option for you.

While a savings account now can earn dividends in the future, the future is a long time away. In contrast, depositing just a few dollars into a prize-linked savings account can boost your chances of winning money right away!

Of course, the benefit is that even if you don’t win today, you’re still building a savings balance for the future.

Other Savings Account Options

If winning prizes isn’t that important to you, consider a high-yield savings account where you can earn a higher annual percentage rate (APY) for your savings. Putting a similar amount in a personal savings account with a higher interest rate of 2.20% could net you almost $3,091 compared to the $2,936 in an American First PLS account mentioned above.²

However you decide to save your money, it’s a great idea to save money starting now.

About the Author

Jon Shigematsu is CEO and President of American First Credit Union. He joined in 2011 and served as its chief financial officer until his appointment to CEO. He has extensive experience in finance, accounting and business management, and is a CPA. He lives in Southern California with his wife and young daughter.

1 Based on an opening deposit of $25 and monthly contributions of $48 and earning .15% APY after your balance reaches $500 and you make monthly contributions of $48 for 50 more months. After reaching a balance of $3,000, you earn an APY of .20%. www.amerfirst.org/WhatWeOffer/Savings/BigPrizeSavings.aspx

2 Based on an opening deposit of $525 and monthly contributions of $48 for 50 months at an APY of 2.20%.