Study: Save More? Think of a Prize
Looking for a way to improve your savings habits? Recent findings suggest you should keep your eyes on the prize.
Americans aren’t saving enough. That was already common knowledge when, in February, the Consumer Federation of America and the American Savings Education Council found that not even half of non-retired respondents feel they’re saving enough for retirement. The same survey also found that not even half of respondents knew their net worth. So how do we start saving more?
This week, researchers at the National Bureau of Economic Research released a paper entitled, Do Lottery Payments Induce Savings Behavior?“ Economics professors from the University of Maryland, Northwestern and Maastricht in the Netherlands surveyed 100 students at the University of Maryland. Participants were asked to choose from a variety of savings accounts. One option was a traditional savings account where the students were rewarded with interest payments over time. Other “prize-linked” accounts were set up with a lottery system. And, although the lottery accounts paid a lower rate of interest than the traditional accounts, participants had a 5% chance of wining $200 over the study period.
After conducting the study and observing the behavior of participants, researchers found that people were more likely to save and will save longer with a potential prize in mind. By in large, participants chose the lottery accounts for their big potential payouts – even though the prizes weren’t guaranteed and, in all, didn’t total to as much as the interest yielded from traditional accounts. Researchers say what these results suggest is something as elementary as the practice of keeping a piggy bank: we’re more likely to save when we can foresee a payout or goal. Unfortunately, there aren’t prize-driven savings accounts in the U.S. but these findings could shed light on why programs like layaway and 401(k)s, for example, are so effective.
Side note: if you’re looking for a way to improve your saving behavior today, the study also references research that finds it can also be effective to name your accounts based on prizes/financial goals like “college fund,” “vacation home” or “summer cruise.”
Photo Courtesy, 401(K) 2013.
