Sunday, February 18, 2018
By LIZ WESTON
NerdWallet
Long ago, people were rewarded for saving. Banks contributed something known as “interest” to the amounts deposited in savings accounts.
OK, they still do, but you’d be forgiven for not noticing the tiny amounts added in a low-rate environment. The current average interest rate on savings accounts is 0.06 percent.
Anemic rates may not be a major reason why Americans don’t save enough, but there’s some evidence that better rewards could induce more people to save. Two approaches that seem to work: matching funds and prize-linked accounts .
The prize-linked approach is by far the sexier one, since it combines savings with a lottery aspect. Each deposit of a certain size, typically $25, earns a chance at a larger cash prize that can range from $100 to $5,000 or even more.
“It seems a bit surreal. It’s not what we’re used to in a savings product,” says John Thompson, senior vice president and head of research consulting at the Center for Financial Services Innovation, a bank-backed nonprofit that researches ways to improve financial health.
The accounts may or may not pay interest. The prizes are often funded from a financial institution’s marketing budget, or from general revenue, says Brian Gilmore, senior innovation manager for Commonwealth, a nonprofit that promotes prize-linked savings.
Prize-linked accounts have successfully promoted savings for decades in other countries. In the U.S., the movement is still relatively small and promoted mostly by credit unions, although Walmart added a prize feature to its prepaid MoneyCard in 2016 and some startups, including Long Game, offer prizes as well.
Matching funds also can bring people into the mainstream and promote savings. Researchers who evaluated Assets for Independence, a federally supported matched-savings program for low-income people, for example, found:
New savings, not including the matching funds, rose a median $657 in the program’s first year.
Economic hardships experienced by participants fell 34 percent.
The use of check-cashing services dropped 39 percent, indicating the program may have guided participants away from alternative banking services toward the mainstream.
Funding for matched savings programs, also known as individual development accounts, typically comes from U.S. Department of Health and Human Services grants, but also can come from financial institutions and charities.