Young or old, saving money is one of the most important things a person can do. The sad thing is that we all know this and yet most people don’t focus anywhere near enough time and energy on saving money. Here are two numbers that should horrify you: According to a recent survey, 62% of Americans have less than $1,000 in their savings accounts, and 21% don’t have a savings account at all.
There are a number of very smart services out there that make saving money easier, and Digit is one that recently got a new round of attention from a few blogs. But as brilliant as the company is and as simple as the concept is, this is one service you should probably stay away from.
First off, what is Digit and how does it work? The service was created by a startup and it allows users to automate the process of saving money in a very nifty way. Digit connects to your checking account, analyzes your income and spending habits, and then automatically transfers money from your checking account to a Digit savings account every few days. The service says that transfers are typically between $5 and $50, and it will “never transfer more than you can afford.”
It’s really a great concept. The idea is to make saving money both painless and autonomous. You don’t even realize you’re saving money because it all happens in the background and the transfer amounts are so small that you don’t even notice them. And best of all, it’s free!
Well, there’s a reason Digit is free and therein lies the problem with this nifty service.
Digit savings accounts do not pay out any interest. There is a “Digit Plus” account that pays out $0.05 every three moths for every $100 in your account, but that minuscule figure is barely any better. By using Digit you are saving money, which is clearly a good thing, but your money isn’t working for you at all. Instead, Digit is using your money to earn interest for itself, and that’s how it keeps the service free.
A quick online search will yield a number of banks with online savings accounts that pay out around 1% interest. $1,000 in an interest-bearing savings account that pays 1% annually will earn you $10 in one year. That same $1,000 in a Digit Plus account will earn you $2.
Put another way, you’ll earn 500% more interest in a standard savings account than you will in a Digit Plus account.
The tradeoff is that typical savings accounts don’t analyze your income and spending habits, and they don’t make transfers in the background in varying amounts every few days. Transferring money online from checking to savings is free with just about any bank though, so here’s what we recommend:
Spend some time analyzing your finances yourself and see how much you can afford to save. If you can’t do it yourself, it’s not hard to find someone to help you. Then tighten your belt a little and set a recurring monthly transfer from your checking account to your savings account for 5% more than the number you land on.
Want a tip that will help you save even more money? Check out this great little life hack we wrote about a couple of months ago.