This post may contain affiliate links. Saving money while you're young is one of the surest ways to build wealth. I talked about the importance of saving early in this post, but here's a quick refresher. When you put money into a savings account, your dollars earn interest. As time passes, you earn interest on your original balance AND on the interest you have accumulated. Earning interest on interest allows your savings to grow exponentially each year.
How to Save Money Automatically With Digit
Why Should I Start Saving ASAP?
Let's say Alexa (25 years old) and Emily (35 years old) start saving at the same time. They each save $10K per year into an account earning 5% annual interest. When they retire at age 65, Alexa will have $1.3 million in savings, and Emily will only have $700K. By starting 10 years earlier, Alexa has almost double Emily's balance! $100K of the difference is from the ten extra years Alexa saved $10K. However, the remaining $500K is just the power of time. Emily missed out on ten years of compounding, costing her over half a million dollars.
I like to think about compound interest another way, too. Let's say you want to have $1 million when you retire. Using the same interest rate assumptions as above, if you start at age 25, you can achieve your goal by saving just over $650 per month. If you start at age 30, you need to save about $875 per month. At age 35, you have to save about $1,200 per month. Each year has a multiplier effect. If you wait longer, you'll have to save exponentially more to achieve your goals.
So, we've established that saving early is important. However, it takes time and effort to put away a portion of your paycheck every month. I'm all about finding ways to make my life more efficient. That is why I use Digit to help me save.
Using Digit for Automatic Saving
Digit is a software platform that lets you save without thinking about it. The software links to your checking account and moves small amounts of money every few days into a savings account set up for you by Digit. Before you know it, you will start to build savings without even noticing. The Digit algorithm is smart enough to analyze your income and spending habits so that it never takes out too much money. On average, Digit withdraws $5 to $50 at a time. No bounced checks here! Promise!
If you want to move your money out of your Digit savings account, you can access it anytime. All you have to do is text Digit and ask for a withdrawal. Digit moves the requested amount back into your checking account within one business day. You can also pause the saving program at any time. It's so easy!
Update: Digit now charges users $2.99 per month after a free 100-day trial.
How Should I Use Digit?
Everyone uses Digit differently depending on their unique financial situation. To guide you on how to prioritize your excess cash, ask yourself these questions:
- Do I have any student loans, credit card debt, or other high-interest rate debt? If the answer is yes, it's important to pay off this debt first. Digit is a great tool to help you set money aside to pay this down.
- Do I have a savings account that covers 3-6 months of living expenses (rent, food, car payment, etc.)? If the answer is no, Digit can help you get there. It's important to have a rainy day fund that you can access in case of emergency.
I use Digit a little differently. I don't have any debt, and I already have a savings account funded with 6 months of expenses. Therefore, I prefer to transfer my savings from Digit into an investment account like Wealthfront. I do this because I expect a higher long-term return from a diversified investment portfolio than from a savings account. Also, a higher interest rate magnifies the impact of compound interest. Of course, I want my money to grow and compound as much as possible over the next few decades. I typically let Digit build up my savings to $500 and then transfer the batch into Wealthfront. You could do the same with any brokerage or investment account you have.
Sidenote: For those of you interested in funding a Wealthfront account, you can sign up here and get your first $5,000 managed free!
Why I Love Digit
I love Digit because it allows me to put money away without thinking about it. Digit has a clean user interface, is easy to use, and makes saving a complete no-brainer. On top of the automatic saving, Digit texts me every morning with my checking account balance. The software will even tell me which transactions changed my balance from yesterday. Before I started using Digit, I checked my bank account every few days to ensure against funky transactions. If I was busy, sometimes I would go a week without checking! This left me with a lot of transactions to sift through. Now, I can easily monitor my account on a daily basis in seconds.
The Bottom Line
Everyone can find a way to use Digit to make their lives more efficient. If you are just beginning to save, Digit is the perfect tool to get you started. If you have an advanced investment strategy, Digit can help you set aside funds to invest without thinking about it. Digit is a prime example of how technology is making it easier for people of all ages to save and invest.
What other technology tools do you use to help you save?