Comments on: Rounding Up Debt Payments: Does It Really Help?

By: Bankruptcy Saskatoon

Bankruptcy Saskatoon — Fri, 29 May 2009 16:33:50 +0000

Great article!! By providing numerical examples you have made is easy to understand extra amounts one can save by just rounding up their debt payments. Great idea and thanks for sharing.

By: Do You Dave Ramsey?

Do You Dave Ramsey? — Sat, 09 May 2009 14:53:56 +0000

Fantastic… thanks for running the numbers for us. I would not have imagined such a difference on just 77cents per month… an amount no one would ever miss. The $4.77 is kinda the same, who would miss that??

Rounding to the next 100 may take a little more effort but you demo just how that effort is rewarded. This is kinda a reverse proof for snowballing and the principle certainly holds.

Great work!
Dave

By: AnnJo

AnnJo — Fri, 08 May 2009 15:07:59 +0000

All the financial advice you hear says that as you get older, more of your investments should be in fixed income items like bonds and CDs. In the last couple of years as fixed income yields have dropped so low, I decided to think of my mortgage (5.5% with five years to go) as a bond, and started a heavy program of extra principal payments.

Instead of earning 1.5% or so on a CD, I’m “earning” 5.5% on my money in reduced interest payments.

The only downside is that, unlike a CD, the money paid down on principal is no longer available in an emergency (short of selling the house or borrowing on a line of credit), but since I’m using “investment” money rather than emergency fund money, I’m comfortable with that.

By: Rick

Rick — Thu, 07 May 2009 19:23:09 +0000

Georgia – If I had the huge burden of a 15% mortgage rate then I probably would forgo all other investments until that house was paid off… but I currently have a 5% rate (13.75 years remaining). I’m not planning on prepaying even small amounts- instead I increased my monthly 401K investments. I’ll need to wait 10 years to see if that was the right choice but I suspect it will be.

-Rick

By: DB Cooper

DB Cooper — Thu, 07 May 2009 16:18:55 +0000

Paying AHEAD is different than paying DOWN on a loan. Paying ahead gets you a month or two or three ahead on your payments. But it does not pay off your loan any sooner per se, or reduce the total amount of interest paid. Paying down on your loan reduces your principal, which in turn reduces the amount of interest paid, but it does not get you ahead – next month’s payment is still due next month.

It’s important to know what’s happening with your extra payment. One of my mortgage companies takes any extra amount and automatically pays it ahead, while my other mortgage company automatically pays it down against my principal.

By: Sara

Sara — Thu, 07 May 2009 14:47:08 +0000

I started paying about $13 extra on my student loans…several months into repayment I had an emergency, and didn’t have the cash. I looked at my student loan and realized that instead of paying $175, I only had to pay $50.00 for the month.

By: Georgia

Georgia — Wed, 06 May 2009 20:10:05 +0000

Rick – I remember the days when the interest rate on home loans was 15% (mid 80’s) and I advised all my loan customers to round up – if your bill is $325, your should be able to round up to $350-400 fairly easily. It would cut 5 years off the end of a 30 yr loan, if you just paid a $10-25 addition. And, why would you save this money for something else. At that time I savings rate was only 5 1/4 – 13%. A man asked me if it wouldn’t be easier to save $1000 a year and put it against the principal once. I informed him that he would be losing money because monthly does much better on compound interest.

In fact, with my 503b I have withdrawn over $14,500 in the last 3 years to work on my home. However, my account is only down by $4,000. How’s that for gaining?

AC – I worked at an S&L that had the mortgage payments set up so that whatever you paid, it took the interest and escrow out first and the rest went to principal. Doublecheck with how your bank does it.

Helix – When I left the S&L in 1986, the early payoff for a loan would get you a penalty only if you paid it off in 5 years. I don’t know what the timeline is now, but it always pays to check on anything to do with money.

By: Bill in Houston

Bill in Houston — Wed, 06 May 2009 19:35:24 +0000

We round up our mortgage payment. What we’re doing instead of paying bimonthly is adding the difference in an amount to our monthly payment (one-twelfth of a mortgage payment), and then we round that up to the nearest 100 buck level.

For example, if our mortgage was $1000 a month, and we added 1/12 of that as a payment to principle, the payment would be $1083.33, which we would round up to $1100.

By: Jimmy37

Jimmy37 — Wed, 06 May 2009 17:30:41 +0000

Gee, you can use the same logic for any savings program!

By: Kat

Kat — Wed, 06 May 2009 14:55:53 +0000

This is good in most cases, but be sure to follow up that it’s being credited properly. I worked for a national gym chain once and any overpayment was not processed automatically properly by the computer, so the user would need to complain and send in documentation and we would then have to manually correct it, and our boss would admonish them not to do that in the future. For gym memberships you aren’t saving anything by doing that anyway, but just saying to in general be careful.

By: Kyle

Kyle — Wed, 06 May 2009 14:01:15 +0000

I’ve been doing this for the last year too, as we struggle to get our finances in order, and if nothing else the psychological benefit is huge.

We’ve got from feeling like dirt because we can’t keep up with our bills to wishing they would hurry up and to celebrating because we can pay ahead.

By: Kristin @ klingtocash

Kristin @ klingtocash — Wed, 06 May 2009 13:38:42 +0000

It always amazes my clients when they see this calculation. If you merge your theory with the Debt Snowball, you are talking about some serious debt killing!

By: Betty

Betty — Wed, 06 May 2009 13:25:19 +0000

What I like to do is pay enough so that the balance ends in a round number. That way when I figure my debts, they’re easier to add. I take last month’s balance, add any finance charges and the amounts I’ve charged, make sure it’s above the minimum, and then round up to the nearest $100. That’s if I don’t pay the bill in full. This system doesn’t work with the mortgage so I send extra and round the amount I send, but it works with my equity line and my charge accounts. I also write a check in quicken for department store charges and print the check and send it when the bill comes in.

By: kristine

kristine — Wed, 06 May 2009 08:18:10 +0000

This is a terrific post. I did this a lot just out of laziness- not wanting to spend forever balancing my checkbook. Figured it helped a little, but I had no idea I was saving so much!

By: Jayson

Jayson — Wed, 06 May 2009 03:26:10 +0000

I agree and have done the same thing for years. It’s always helped pay things down quicker and has saved a little bit of money over the long-haul.

I’ve never truly thought about the savings though, it’s just been easier to pay $570 as opposed to $562…the savings on the round to the nearest hundred example is amazing. Over the decades, that extra money truly pays off.

By: James

James — Wed, 06 May 2009 01:21:28 +0000

To resolve partgypsy’s problem, it might be helpful to have two checking accounts. Have your pay deposited into one and then transfer the amount you need each month (for fixed bills like the mortgage, car payment, etc.) into the second account. That way you have one account that is solely for the ongoing debts that your creditors can debit and the other for your daily operating expenses.

By: partgypsy

partgypsy — Tue, 05 May 2009 20:54:47 +0000

Amy, I agree directly paying bills suits me better. The last few months I tried to streamline my financial life and automated a handful of bills, but they were scattered throughout the month at odd times and for amounts that changed (gas bill). I forgot about those bills and ended up overdrawing my account 2 months in a row though that had never happened in all my years of directly paying bills (whether electronically or by check). Yeah I felt pretty stupid. I’ve adjusted the standing amount in my checking to cover these bills so hopefully it won’t happen again. I would like to cluster when the bills get drawn but was told they were unable to move them and for most will only give me a “window” of when the money will be drawn, not a specific date so there are drawbacks to the automatic drafts.

By: Amy

Amy — Tue, 05 May 2009 20:33:56 +0000

Kevin, in the U.S. it’s usually optional how you pay — yes, all the companies are trying to get people to agree to automatic withdrawals from banks, but for the most part they don’t have the right to require it.

I only have one automatic withdrawal. I pay the rest online, and I pay one bill in person (their online system is horrible — they claim you have to allow 5-7 business days for payment to credit, which is ridiculous).

I think it’s good to still PAY bills, even if online. Almost every employer now requires direct deposit of wages. When everything is automated with no intervention by (collective) you, it’s very easy to get away from understanding that your work results in your wages, and your wages pay your bills — that you incurred.

That’s the one thing I really liked about waitressing way back in the day…. I worked, and I got paid. Immediately. It was very tangible.

By: Chiara

Chiara — Tue, 05 May 2009 20:23:18 +0000

Kevin, most banks I have used or heard of in the U.S. give you the option to do automatic drafts, pay online, or mail a check (may not apply to some small mortgage companies? I don’t know). I haven’t mailed checks for bills in many years except for a 401K loan that has to be mailed with a certain form and I find actually putting a check in the mail to be a hassle that I’m likely to forget.
But when I married my husband, he was mailing checks for everything – that’s how he felt comfortable. I took that over in a hurry! :D

By: deb

deb — Tue, 05 May 2009 19:57:58 +0000

I like your example – we just refinanced with a $148,000 loan @ 4.625% so we’re in the same neighborhood number-wise. The savings really add up. We’ve always paid more than required on our mortgages.

Oh, and some banks REQUIRE that you mail a check if you’re paying anything extra and want it to go toward principal. We’re with Wachovia and have to do that, unfortunately.