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🔢 Key Takeaways

  1. Half of Americans can't afford a $2000 emergency in 30 days, including those with six-figure salaries. Despite this, Americans spend about $1000 per year on lottery tickets, highlighting a need for improved savings habits.
  2. Playing the lottery offers the potential to change one's life, but the cost of consistently buying tickets can add up. While winning may cause people to forget their losses, it's important to consider what we are sacrificing in order to play.
  3. Prize-linked savings combine gambling excitement with positive financial outcomes, offering low-wealth individuals a chance to save money and potentially win big. This concept has been successful in other countries and could benefit American households.
  4. Prize-Linked Savings accounts offer a fun way to incentivize saving money and can be a game-changer for improving savings rates, especially for low-income Americans who typically struggle to save. Despite legal limitations, several credit unions have piloted the idea successfully.
  5. Save to Win incentivizes savings via a lottery system. Participants can win prizes for every $25 saved. The program helps people without savings plans and promotes local credit unions and the economy.
  6. By pooling interest paid on small accounts and offering lump sum prizes, MAMA attracted over a million new customers. Creative solutions can provide benefits to those excluded from traditional banking systems.
  7. MAMA's savings program was successful in reducing the number of unbanked individuals in South Africa by allowing a minimum deposit of 100 rand, but it was shut down due to a lottery dispute and lack of interest on deposits.
  8. Although MAMA did not achieve its initial goal of expanding banking to the unbanked population, it still attracted new customers and significantly lowered the cost of acquiring them through its innovative approach to savings accounts.

📝 Podcast Notes

Americans' Struggle with Savings and Love for Lottery

Americans are generally horrible at saving money, with half the country unable to come up with $2000 in 30 days, which means they are one emergency or crisis away from dire circumstances. This is not just the poor as even those making $100k-$150k per year struggle. However, Americans are excellent at spending money, including on lottery tickets, with households that play the lottery spending about $1000 per year on tickets. The US will buy about $60 billion of lottery tickets, with some locations selling in excess of $8-9 million per year. This is a sign that Americans need to improve their savings habits, as many are one disaster away from severe financial pinch.

The Appeal of the Lottery: How Skewness and the Chance to Dream Big Drive Sales

The lottery is the most popular form of gambling in the US, with half of adults surveyed having played in the past year. The appeal lies in the chance to dream big and win big, which is a phenomenon economists call 'skewness.' Skewness is the idea that the small odds of winning a big prize still offer the potential to change one's life, which is not offered by traditional investments like money market accounts. Regular people do spend a lot of money on lottery tickets, but Melissa Kearney, an economics professor at the University of Maryland, wonders what people are sacrificing in order to buy them. While winning may cause people to forget their losses, the cost of consistently playing the lottery can add up.

The Thrill of the Lottery and the Goal of Saving Money

Researchers are exploring the idea of prize-linked savings, a new financial product that offers the thrill of the lottery with the goal of saving money. Low-wealth individuals often turn to state lotteries as their only chance of accumulating large sums of money. A recent survey found that 20% of American adults believe their greatest chance of winning hundreds of thousands of dollars is through the lottery, increasing to 40% for those making less than $25,000 a year. Prize-linked savings offer a win-win situation, catering to the American appetite for gambling while offering positive returns. This concept has generated enthusiasm among economists all over the world and has been successful in countries like the UK and South Africa.

Prize-Linked Savings: A Fun Way to Save and Win Big

Prize-Linked Savings account provides an attractive option for people to save money, especially low-income Americans with a frighteningly low savings rate. The possibility of a life-changing payout appeals to people's preference for highly skewed payoffs, and it taps into the human tendency of loss aversion. However, state laws prohibit such a program in most states, as only state-run lotteries are legal. Peter Tufano's research convinced him that the idea could help Americans, and in Michigan, a group of credit unions piloted the idea. Prize-linked savings programs offer a fun way to save, engaging people who find banking services mundane. This structure has the potential to be a game-changer for people looking to improve their savings while enjoying the process of doing so.

Save to Win: How Prize-Linked Savings Program Encourages Better Saving Habits

Save to Win is a successful prize-linked savings program that incentivizes people to save money by providing a fun way to do so through a lottery concept. Participants have a chance to win cash prizes, including a grand prize of $100,000, for every $25 saved in a one-year certificate of deposit. By introducing a competitive element to savings, Save to Win attracts customers who previously had no savings plan and who may have spent money on lotto tickets or gambling. The program has proven particularly effective in South Africa, where many people are unbanked and their savings are kept outside the mainstream banking system, hindering economic growth. By taking part in Save to Win, individuals can contribute to their own financial stability while supporting their local credit unions and the economy at large.

The Million a Month Account: A Creative Solution to Banking Exclusion

The Million a Month Account, also known as MAMA, was a creative solution to the problem of excluding people without bank accounts from the banking system. By pooling little bits of interest paid on all the little accounts and paying it out in lump sum prizes to select lucky winners, Keip's bank attracted over a million new customers. However, the success of MAMA attracted the attention of other banks and regulators, as well as the South African National Lottery, who initially thought it fell under promotional competition but later labeled it as a lottery. Despite the controversy, MAMA's success proved that creative solutions can attract new customers and provide people with benefits they otherwise may miss out on.

MAMA, A South African Savings Program Shut Down Over Lottery Dispute

MAMA, a savings plan program in South Africa, brought in over a million customers and $200 million in deposits before being shut down by the National Lotteries Board. The board claimed that the program infringed upon the state lottery's right to be the only game in town. However, the lawyer who represented the lottery argued that MAMA's lack of interest on deposits was an issue, as South Africa has a relatively high interest rate. The program was aimed at the unbanked, but most of the funds came from regular customers with free money to spare. Despite its closure, MAMA successfully helped reduce the number of unbanked South Africans by making it easy to open an account with a minimum deposit of 100 rand.

The Success and Failure of MAMA, a Prize-Linked Savings Account

MAMA, a prize-linked savings account, aimed at expanding banking to the unbanked population by offering a lottery payout. However, the majority of the deposits came from the banked and more wealthy customers. The program was shut down by the National Lottery, but it did successfully attract new customers and expand banking. Robert Keip, the creator, stands by its success, stating that 20% of MAMA accounts were opened by previously unbanked individuals. However, lottery officials in America are not enthusiastic about the idea of prize-linked savings. Even though MAMA did not reach its primary goal, it still managed to acquire $200 million in deposits and lower the cost of acquiring new customers from $300 to $5.