[ssharp]

I think it's very important to instill saving behaviors early on in your adult life. After graduating college, I had plenty of debt, but still made sure I was putting money into a savings account.

Technically, it would have been much wiser to put any excess money towards 15% APR credit card debt than in 5% saving accounts (5% savings accounts did exist for a few years prior to the 2008 collapse), but actually having money to pay for unexpected expenses rather than building the debt I was trying to pay off, felt better.

---

Freakonomics did a podcast a few months ago, using either this study or a similar study as part of the podcast. The podcast was about lottery-linked savings accounts. The other half of the equation was that the same 50% of Americans who could not come up with $2,000, were also the ones most likely to play low-odds lottery games. Lottery-linked Savings accounts take the relatively minuscule interest gains on each account, and throws them into a lottery pool, where one or several winners will win the "prize".

This style of savings account worked very well in one country (I believe it was South Africa). The incentive to save, with minimal interest gains, was low. However, the idea of a big payday, which technically was free (you only surrender your interest), led many more people to put money away.

These bank accounts are largely illegal in the United States. Partially because of their image, and partially because states don't want to sacrifice their own state-owned lottery cash cows. I believe a credit union in Michigan was able to work around some laws and find a legal way to offer a lottery-backed savings account.

[jerf]

I find it helpful to convert debt interest rates to real money. My student loans are down to the point where I could drain my savings and pay for them, and while they are low interest they're still above inflation. (Probably. It's kind of getting close.) But if I actually calculate in real money what's left, it's about $125 in interest left to pay over three years. I'd rather hold on to the cash; at this point in my life, that's a rounding error. A largish one, but still a rounding error. Whereas losing all my savings could really hurt; we dipped into them quite deeply recently when I had both my cars break down in the same week and also a moderate house issue.

Keeping cash on hand instead of paying off cheap debt can prevent you from having to incur expensive debt, which functions as a non-obvious term in deciding how much cash to keep around.

[hugh3]

I think it's very important to instill saving behaviors early on in your adult life.

Why early in your adult life? People should begin saving as children.

My parents were sensible. I got my first bank account at the age of five, I think. They paid me some small amount of pocket money (two dollars a week?), and encouraged me to save it up to buy things I wanted, and to worship the magic of compound interest (it helps that interest rates were actually decent in those days). I enjoyed watching the amount in my bank account go up much more than I enjoyed actually buying things with it, so I got into good saving habits.

I can't fathom the idea of an adult (or at least, an adult with a job) not having a mere two grand in their savings account, and certainly not of having negative net wealth (ie credit card debt).

Parents! Teach your children about money early!

[david_elson]

I second this. My parents set up a notebook in their office that was my running checking account. Whenever I got a birthday check or earned some money, they would cash it in their own account and credit the value. Whenever I wanted to buy a toy, they would deduct the value. (You were lucky that you got compounded interest, though! My parental account had a zero interest rate.)

At the age of 10 I was acutely aware of the value of things and more concerned with keeping the balance on my imaginary account high than with having every toy or computer game I could see. To this day I don't like buying "stuff". It was an awesome parenting move.

[aquark]

Agreed -- but that worked much better when I could buy a 13% savings bond (late 80's) than showing my kids the <$1 month interest payment they get now.

I realize that inflation may well have eaten into that 13% hugely but as a pre/early-teen that didn't factor into my view.

[kwis]

http://hbswk.hbs.edu/item/5867.html

Here's a paper that's probably one of the original sources for the Freakonomics piece.

I would love to see Prize-linked savings in the US. It'd be fun to have some money sitting in an account that has powerball-esque payouts, but without the powerball-esque destruction of the original bet.

[ydant]

I find the idea behind the lottery linked savings account very interesting. In order to save others the trouble of looking for it (although it was a quick Google), I believe this is the podcast you were referring to.

http://www.freakonomics.com/2010/11/18/freakonomics-radio-co...

[sosuke]

A lottery-linked savings account sounds awesome since I already play low-odds lottery and put money into savings every month. Texas won't give up their lotteries or multi-state lotteries for anything though.

[illumin8]

Lottery is just a tax for those that are bad at math. Why would you do both? Putting money into a low yield savings account will get you a statistically better return over your entire lifetime than buying a few powerball tickets every week.

[bryanlarsen]

Have you actually done the math? It's certainly not hard to find lotteries where the expected payout is above 100%. In the big rolling jackpot games, the average payout is about 50 cents on the dollar, but after weeks and weeks of paying 10 cents on the dollar with no big winner, the jackpot builds until it's higher than the expected number of dollars coming in.

[T-hawk]

It's certainly not hard to find lotteries where the expected payout is above 100%.

This is true, but there's more to it. It's not so easy to find a lottery where the expected post-tax payout is above 100%, since you'll need the pre-tax expected payout to be about 160%. You also have to figure in time value of money, since all large lottery prizes pay the advertised face value as an annuity up to 20-30 years into the future, so you're paying in 2011 dollars but receiving part of the prize in 2031 or 2041 dollars. Finally, you have to be the lone winner to come out ahead, and not be splitting the jackpot with another winner.

Multiply that all together and the situation does not happen. The largest Powerball jackpot ever was $365M, which barely overcomes just the loss to taxation on the 195M to 1 odds.

[bryanlarsen]

In Canada, lottery winnings aren't taxable. Buying lottery tickets can't be claimed as a business expense, so paying tax on the winnings would be hypocritical. Of course, being hypocritical rarely stops governments.

Lottery winnings in Canada are always advertised in the "lump-sum payout" amount.

The threshold varies slightly depending on how many tickets are sold, but for Lotto 6/49 in Canada, any payout above about $32M is "in the money". This isn't common, but it does happen several times every year.

[sosuke]

I already work my buns off trying to strike it rich and the odds are terrible but playing the lottery gives me the hope that I could just get lucky one day. I figure I should exhaust all my opportunities if I'm going to make it.

[ssharp]

Assuming the prize-linked account providers don't rake the prize pool, it's an even money bet.