jaqian

A recent Wall Street Journal article revealed that our country’s savings rate may be lower than the accepted 6.9%.  A person who has studied the savings rate for years has adjusted for the stimulus package, and has arrived at a much lower number:

Charles Biderman of TrimTabs Investment Research, an economic-analysis firm in Sausalito, Calif., has studied the saving rate for years. He adjusted for one-time boosts from the stimulus package and used daily income-tax reports from the U.S. Treasury to take the latest job losses into account. By this revised estimate, the saving rate may actually be running as low as 0.9%.

Yikes!  I guess we haven’t learned our lesson.  Saving may feel impossible for many people.  But fear not, fellow non-saver.  Some bright guy at Harvard may have come up with a plan:

But psychologists have long known that people tend to overestimate the odds of rare events. Applying that behavioral insight, finance professor Peter Tufano of Harvard Business School has devised a clever program called “Save to Win.” Launched earlier this year for members of eight credit unions in Michigan, it is a cross between a certificate of deposit and a raffle ticket. Members who put $25 or more into a Save to Win one-year CD are entered into a monthly “savings raffle” for prizes up to $400, plus one annual drawing for a $100,000 jackpot. Only Michigan residents are eligible to participate.

This unusual CD is federally guaranteed by the National Credit Union Administration and pays between 1% and 1.5% annual interest, a bit lower than conventional rates. In 25 weeks, the program has attracted about $3.1 million in new deposits, often from people who have never been able to set money aside.

So, let me get this straight.  People are investing more in a lower-rate CD than a conventional one, because they have a chance to win a  prize in a raffle?  Is this the movie Idiocracy come to life?  I could go on about the opportunity cost of the lower interest earned, and the remote odds of winning the drawing, but you probably already know that.  If you’re in dire financial straits, you should sock away as much as you can, in order to take advantage of the magic of compound interest.  I don’t see how this program is doing the less fortunate any favors.  If people pass on buying lottery tickets in order to buy the CD, then I can see it as the lesser of two evils.

Maybe they should offer financial education books as one of the prizes.

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