Summary: There's only one explanation for venture capitalists rushing in to fund a startup that seeks to revolutionise saving by eliminating paying interest: they must believe that many young people really are so lazy and uneducated about saving that they will line up to be fleeced.

Digit is a new startup that uses a fancy smartphone app as the lure to get young people to let it control their savings and capture 100% of any interest. It's slogan is: "Digit saves for you, so you don't have to think about it."

But starting a long-term saving habit early, and obtaining the best return relative to risk, are critical life skills that every individual has to learn themselves if they want to thrive in a modern economy.

Enterprises like Digit aren't just stealing your potential returns from saving, but are teaching the wrong idea that saving is something you might try and do, if possible, after spending. In reality, the value of saving doesn't need to be appified or reinvented for young people. It just needs to be discovered and understood by everyone, with the principal lesson being the magic of compound interest.

Gain: Tens of thousands of dollars over your lifetime by saving early, maximising your savings rate, and investing wisely.

The real secret to savings is to fully understand the magic of compound interest

Financial predators like Digit are insidiously designed to hide the only key secret to developing an effective saving and investing habit: a deep appreciation of the magic of compound interest. In Digit's case, they steal your interest entirely and pretend that savings is solely about what you manage to stash away under a virtual mattress.

Albert Einstein summed up the key idea of savings and investing best. Note how Digit emphasizes that you don't have to think about saving, while Einstein reveals that truly understanding the secret to saving is the only thing that really matters:


The best way to understand the value of: (a) saving early; (b) saving often; (c) being the recipient of compound interest rather than the payer is to review simple explanations like those below.

> Business Insider - These 3 Charts Show The Amazing Power Of Compound Interest

> Get Rich Slowly - The extraordinary power of compound interest

The graphs are particularly enlightening as to the different potential outcomes that are driven by leveraging compound interest for as long as possible at the best return rate relative to risk:



Much of this blog is actually just about maximising your gains from the magic of compound interest:

- By understanding how critical saving and compound interest really is

- By aiming to grow wealth through saving not debt, and via the reliability of compound interest not speculation on things like future property prices

- By starting to save early and with a high proportion of your discretionary income. But also understanding it's never too late to start saving

- By reducing wasted or unnecessarily high expenses so you can save more

- By minimising risks and losses to your capital

- By maximising investment returns including by eliminating fees, obtaining the best yields available, and ensuring your money is always working rather than dead

Because accumulating and compounding these gains (no matter how small) is what really provides financial freedom, I typically use the MoneySmart Compound Interest Calculator to do the maths and visually show what difference applying each money principle makes in the long run.

Taking optimal advantage of compound interest takes considerable knowledge and ongoing action

While it's critical to appreciate the magic potential of compound interest, the explanatory graphs and calculators are oversimplified and can be a little misleading until you figure out all the wrinkles. To realise these potential gains there is plenty of learning, attention and effort required:

- Steady compound interest rates above 3% in very safe investments (e.g. bank term deposits) are now very hard to achieve in the developed world where growth is likely to be low for years. During occasional credit crises or asset bubbles, interest rates on bank term deposits will spike and this is the time to lock in term deposits for 5 years.

- Strictly speaking, compound interest refers to capital-protected investments only like bank term deposits. Yet most investments promoting the benefits of compound returns are not capital-protected, so you need to carefully assess the risk of capital losses. For example, I invest in RateSetter, a P2P lending platform, with 5yr returns of 10% after careful evaluation of the risks and initial investments, and appreciating there is some chance of capital loss. I don't invest significant funds in most other P2P and particularly Person-to-Business lending platforms based on relative risk/return evaluation.

- Compound interest returns are considerably backloaded: the majority of the gains come at the end and the big gains come from lengthy periods of saving. But few individual's savings turn out exactly like the exponential graphs - people want to spend savings, or at least the yield on them, throughout their life. This isn't an issue as long as you understand how it works.

- Savings aren't a replacement for earning income until you've accumulated a sum large enough to support your annual living costs from safe yields. Young people should always prioritise investing in themselves (education, skills, career opportunities) to obtain higher incomes. This far outweighs too much time and effort poured into optimising saving and investing to the nth degree.

See:
> Wise Bread - The False Allure of Compound Interest


Further Info:

Business Insider
> This money-saving app never returns the interest its users earn - and it just raised another $11 million to do it