Until recently, my savings consisted mostly of unexpected windfalls. A tax return here, a birthday check from Grandma there. Over time I’ve amassed enough that I can withstand the odd financial shock. (The physical pain of a root canal is now slightly more intense than the anxiety I have over paying for one.) But I still don’t have really anything you could call a personal finance strategy, and apparently neither do most Americans: adults younger than 35 have a savings rate of negative 2 percent.
Digit, an automated savings account that opens to the public today for US accounts, hopes to put us back in the black. Let it monitor your income and spending habits, and it will begin socking away a few dollars whenever it thinks you won’t miss them. I’ve been using it for a month now, and painlessly managed to save $360 toward a trip I’m planning to take this summer. It’s the best thing to happen to my personal finances in some time, and it seems crazy that no retail bank has developed a system like this before.
It's crazy that retail banks aren't doing this
But retail banks have little incentive to serve the middle class, says Ethan Bloch, Digit’s founder. The big banks make most of their money from low-income customers, through overdraft fees and similar taxes on being broke, and from high-income customers, through the interest on their high balances and fees for managing their wealth. For the rest of us, banks just don’t see much profit opportunity. As a result, we don’t see much innovation. "Society has gotten so complex, yet the tools we use to manage our finances haven’t changed much," Bloch says. "The retail bank experience today is basically the same as it was 500 years ago in Holland."
Here’s how Digit works. You can sign up for an account on the desktop web or on your phone; you’ll need your banking information handy, but the process is relatively painless. By signing up, you’re creating a new savings account, managed by Digit and insured by the FDIC. Once you’ve built up some savings in Digit, you manage it with simple text commands: text "withdraw" along with an amount, and Digit moves the money from your savings account back into checking. The service is "free" in that there’s no fee to use it, but it does come at a cost: your Digit savings account doesn’t pay interest. (Digit has a good FAQ here.)
One reason many of us don’t save more money is that it’s painful to think about. Digit is fun to use in part because it does all this thinking for you. Once your checking account is linked, Digit will note your balance, and then begin to observe your cash flow. When do you get paid? What recurring bills are coming due? And what are your spending patterns like? With this information in mind, Digit will siphon away a few dollars here and there into savings. The goal is to take away money in amounts so small you don’t notice them.
Saving money is painful to think about
At first, Digit was really cautious with my money. In its first transaction, on January 23rd, it saved $6.50. But over the next couple weeks, as my balance recovered from holiday spending, it got a bit more ambitious: $12.68 one day; $16.48 the next. This week, just before a payday, Digit noticed I had been under-spending lately and whisked away $70.73. I now have $363.71 saved up in Digit, and let me just say: I’m going to fucking Hawaii.
It turns out that lots of Digit customers have goals like these. "Everyone has something in mind that they’re saving for that they like to think about throughout the day," Bloch says. "We had a person write in and say, 'Digit saved me $300; before that I’d saved $400 my entire life.'" On average, Digit saves users 5.5 percent of their income; beta testers like me are saving a collective $1 million per month. The average age of its users is 27.
Digit was designed so that you can interact with it entirely through SMS. Once a day it will text you with your checking account balance; you can text back commands to view your Digit balance, check recent transactions, or move your money back and forth. For now, there are no plans for an app beyond the mobile web version of the site. "We want to see how far we can push it SMS-only," Bloch says. I appreciate the simplicity of SMS, but it feels a bit basic for something as important to me as my personal finances. (I’d much rather have push notifications and a native app, myself.)
Accounts are free, but they don't earn interest
Digit is at a very early stage; it has raised $2.5 million from investors, including Baseline Ventures and Google Ventures, and has a team of five working in San Francisco. Depending on your appetite for cutting-edge financial products, you may want to let Digit establish a track record before handing it the keys to your checking account. But all Digit accounts are FDIC-insured up to $250,000, and all your personal information stored with Digit is anonymized and encrypted.
Eventually, Digit plans to introduce additional ways to help users save and manage their money. Personally, I’d love to see it take a similar approach to retirement investing: I contribute a set amount to my 401(k) with every paycheck, but I’d much rather contribute a dynamic amount based on the cash I had left over at the end of the month.
In the meantime, for me at least, Digit is living up to its promise. It’s turned saving from something that filled me with anxiety into something that helps me relax. And if I can keep my spending in check, I’ll soon be relaxing all the way to Honolulu.