One technique that I’ve always used to make my personal finance management easier is to round up regular debt repayments to the nearest $10 or $100. I do this for two reasons. First, a round number is much easier to handle for simple calculations. With a nice round number, it’s easy to just glance at my checking account balance, subtract those nice round numbers from that total, and get a good grasp of where exactly I’m at with my money. Second, the extra bit that I pay from the rounding usually chops a payment or two at the end, saving me a bit of money over the long haul.

**The Dollars and Cents**

Let’s walk through three examples that demonstrate quite clearly how rounding up can directly save you money.

**The Scenario** You’ve just taken out a $150,000 mortgage to buy a home. It’s a thirty year mortgage, locked in at 5%. Thus, your monthly mortgage payment is $805.23.

**Rounding up to the nearest dollar** If you decide to round the payment up to the nearest dollar, you’ll just submit a payment each month for $806 – an overpayment of just $0.77. Your final payment would be reduced to $165.16, and your total savings over the lifetime of the loan would be **$363.64**.

**Rounding up to the nearest ten dollars** If you decide to round the payment up to the nearest ten dollar increment, you’ll submit a payment each month for $810 – an overpayment of $4.77. Your payments would end four months earlier and your final payment would be only $112.15. This would result in a total savings over the life of the loan of **$2,220.67**.

**Rounding up to the nearest hundred dollars** If you decide to round the payment up to the nearest hundred dollar increment, you’ll submit a payment each month for $900 – an overpayment of $94.77. Your payments would end *six years and four months earlier* and your final payment would be only $2.95. This would result in a total savings over the life of the loan of **$34,605.19**.

The savings numbers are *actual savings* – the amount that the total interest on the loan would be reduced. I did these calculations using Bankrate.com’s excellent mortgage calculator.

**The Psychological Benefits**

For me, there are big gains from this method beyond the mere dollars and cents.

First of all, as I mentioned above, **it makes personal finance calculations much easier**. With rounded payments, I can easily do calculations in my head that, without rounding, would require a spreadsheet or a calculator. That convenience comes through time and time again, from thinking about ATM receipts to doing some basic budgeting on a piece of scratch paper. Rounded payments save time.

Second, **I feel good in the realization that I’m paying ahead on the debt.** While it’s not a large amount, it is an amount that’s going straight against the principal, and with each month’s overpayment, the interest burden is going down faster and faster and faster. It feels quite good to see that each time on the account statement.

Third, **the overpayment amount is small enough that I don’t “miss” it.** If I make an $8 overpayment, those $8 are not going to make the difference in my personal finances. I’ll silently make up the difference throughout the month with better buying habits at the store or an impromptu decision to not splurge on something. The “downside” of the early payment is small enough that it has no real impact on my finances – until, of course, the bill goes away earlier than expected.

**Automation**

Having said that, it’s worth pointing out that *automating your finances changes this pattern somewhat*. Instead of worrying about a round overpayment on each of my automatic bills, I instead make sure that the *total* amount of the bills I pay automatically each month is rounded to a nice even number.

Here’s how I do it. Each month, I have a payment due for my student loan, my car, and my mortgage. When I add these together, it comes up to a very odd number. *That’s* the number I round up, to the nearest hundred, then beyond that I contribute several hundred more in an effort to pay down the debt early. In the end, I have a nice flat number I use each month in my calculations – $2,500, to be exact.

Since I pay all of these bills on the same day automatically, it’s easy for me to look at my balance and do the mental math necessary to make sure everything is in proper order.

Wow. That’s actually shocking that you could save even that much money just by rounding to the nearest dollar.

I definitely did this when I was paying off my student loans (I overpaid a fair amount). Never actually calculated how much it saved me.

Great idea Trent.

We don’t have a mortgage on the home we live in, but we do have a mortgage on a rental property we own. We both round up to pay this mortgage, and we make half the payment every 2 weeks, which has a small positive effect as well. For instance, say you owe $300/month on your mortgage, we pay $200 every two weeks. It works for us. Good post. I like a post with hard numbers and calculations.

Nice. I’ve done this myself some, but really just for simplicities sake. I didn’t realize how much it could actual impact a loan over the course of a longer term.

its funny you wrote this article as it was only a few hours ago I was giving this advice to a friend of mine who is trying to pay off his debt. right now, he is only paying the 3% minimum required which is really getting him nowhere. I told him that even if he rounded up his payment by a little bit, the savings in the long run would be significant. We calculated this strategy and it was indeed correct. Great post!

I’ve always used this method too. Number one for me is the even numbers to work with in the checkbook. I also add to it by instead of paying the loan amount due, I always pay the late payment amount & round that up. The late payment is usually $15-$20 more than the actual payment. So if the payment is $106.75 & the late payment is $123.85 I would round up to $125.00, I’ve really paid $18.25 extra towards paying down the loan. This system confusd my husband at first, but he caught on & it’s working great for us.

How do you make sure that the automatic overpayment is applied only to the principal? When we refinanced, my loan officer told me that the best way to be sure of that is to submit a check in person at the bank and tell the teller to apply it only to the principal. Perhaps it depends on who your mortgage is with.

I do this with my car loan- $298.73 becomes $300- mostly for the psychological benefits.

I love this method– I use it for making progress on my student loans. Specifically, I shoot to have the principal go down by a certain amount every month, say $500. That way I can see real progress (somehow it feels more real in round numbers) — my payments are normal for all but the highest interest loan. For that loan, I pay extra to reach the $500 number (plus interest that accrued that month). Kind of like a debt snow-ball, but more logical as the extra pennies and dollars are going toward the highest interest loan.

I do this with almost debt. Interestingly on my car loan ($284 rounded up to $300) has brought the monthly payment down to $240ish, and as I continue to do it I have a feeling it will continue to go down. It has to do with prepaying the ending payments.

I did this with my mortgage but you had to write on the mail in sheet what any overpayment was to be applied to (interest, principal or escrow). So I still had to deal with a nonround number, even if the number in my checkbook was round. Anyway I do my finances in quicken where it does the calculations for me so odd numbers don’t bother me. I rounded up my mortgage payment for the savings on interest rather than ease of use. Although it is much quicker to write a round number on the check. :) (yes I still paid my mortgage by check, horrors!)

Definitely a good practice to have. Unfortunately not all lenders automatically apply overpayment to the principal. I have to mail a check marked clearly that it is a principal payment to a separate address for my automobile loan (NMAC is the lender). Otherwise, overpayment is just subtracted from the next month’s payment, which I think is a greedy and irresponsible practice for lenders, especially considering today’s economic environment.

Psychological benefit – you know how on your mortgage statements, it breaks down your previous payment, and the initial statements will say something like “interest paid, $678.24, principal paid, $3.76″? When you round up you get the satisfaction of seeing that “principal paid” number jump up. I always got a kick out of that.

All these low mortgage payments that people are quoting make me envious. I don’t have a mortgage yet, but most of the properties I’d be interested in would cost me well over $1000 a month. But I shouldn’t complain – it is my choice to live in an area with high (but still falling) home prices.

But I have a question: In paying extra on their mortgage, has anyone here had trouble getting the bank to correctly apply the extra payment to the principal? I’ve read accounts of banks not processing the extra payments, or not knowing what to do with them, or applying them toward future interest or something crazy like that. And I’m wondering if this is really a widespread problem.

@Johanna #9. My mortgage payment is $2300. Does that make you feel better? I live in the suburbs of Washington, DC.

Our mortgage comes out automatically so we don’t round up. However, my husband will do that on bills, and it drives me crazy because then the next statement shows a credit (and we don’t get any benefits by paying more early)!

@Michele: I’m in the DC area too, so I’m well aware that there are people with mortgage payments of $2300 or even more. :) But I forget, sometimes, how much less people pay in other parts of the country.

@Johanna – I think that was more of a problem paying by check with the payment book. Currently the big lenders have that issue pretty well figured out, there’s usually a checkbox on the statement, or a separate blank for each amount. I do mine online and there’s a textbox for current payment, one for extra towards principal one for extra towards escrow, and one for extra monthly payment (not sure what the last one does). I think most mortgages now end up being sold to a big bank (mine’s owned by citi), and those banks tend to follow the same conventions to reduce any customer retention advantage.

All the mortgage books did say to make sure there’s no penalty for early payoff. I looked for that on my 4 or 5 mortgage quotes and I didn’t see a penalty, so I think that’s mostly obsolete as well.

@Johanna, I pay our mortgage online, and the online screen gives me the option to apply the extra towards principal instead of interest. However you pay your mortgage (in person, by mail, online), they are required to apply the extra payment to principal if you so specify.

Trent, wonderful post! By lucky coincidence, we have a $150,000 house with a 30-year mortgage at close to 5%, so these numbers really do apply to me. :-)

There IS a difference, however: to get that low rate, we had to do a 80/15/5 mortgage package. We needed 20% down for that rate, but who has 20% down? So we put down 5% to get a smaller mortgage loan for 15% of the overall mortgage. Bundled together, that made 20% to get the great rate on the 80%. (Does that make sense?!)

Now, the 15% loan is 30-years, but PAYABLE in 15 years — but we were told that going in, and they told us how much extra to pay to make sure it’s paid off in 15 years. I’m already excited, because when that is paid off, I will just apply the same amount each month as extra towards the larger mortgage. I won’t miss it at all, but boy, that will bring the larger mortgage down a LOT faster.

A 5% rate isn’t really a great rate of return on a 30 year investment- the worst 30 year period for the S&P500 had an 8% annual growth rate.

If you invested the money and got the worse case 8% annual return that $0.77/month would grow to $1147.58 after 30 years. That’s $870.38 of interest instead of $363.64. Why not invest that spare change rather than prepay a mortgage at a low interest rate? Or pay off any higher interest rate debt?

-Rick Francis

Great advice. I like the calculations… I need to start doing this for my mortgage.

Can some one please explain what Trent means by final payment.

Thanks

@Kode When you pay an accelerated rate on a loan, frequently your last payment is less than the payments you were scheduled to be paying. If you stick with the payment schedule provided by the bank or credit card company, this doesn’t usually happen (although sometimes its unavoidable even then). Usually, if I am going to have a final payment that small, I just roll it into the previous payment to make a slightly larger than usual final payment.

Don’t some mortgages charge penalties for early payment?

Also, I’ve read the small print on our car loan (which would be a fine candidate for rounding up) and they will only put overpayments towards your next month’s bill unless you tell them otherwise… i.e. they will not knock it off the principal. I know this would still cut down on our last payment but it would be much better if it hit the principal.

I probably will when it’s next on the “snowball,” but for now I don’t know if it would be worth it for the extra $0.76 per month. As it is I like Trent’s method of “snowballing” into a savings account until you can make a big extra payment. I know it’s not ideal interest-wise, but it works for me.

@Kode. Final payment would mean the final check you’ll cut to the mortgage company at the end of 30 years (if you decide to stay in that house for > 30 years)

Call me silly—but what I do is a little different than all of you in paying off my mortgage. I’ve already paid off one mortgage on a home with a true vaulke of 200,000 this way in under ten years–I was also a single mother of three kids making a teachers salary.

I look at how much my payment actually goes to principal each month and double it. I feel like (only in my head) that I paid off 2 months of house notes in one month. I look at my statements quarterly–if it states 250.00 is being applied to principal I pay that extra. All banks are really nice about changing your autmoatic draft even for the next month if you do by the middle of the previous month. Try this if you can, you wouldn’t believe how quickly your mortage does go down!

@Kode, I believe “final payment” means the last payment you make on a mortgage or car loan, because the actual amount is just estimated. For instance, if you have a car loan for five years, even if you pay exactly the same amount each month, if you pay the last payment even two days early, they have to recalculate that final payment to adjust for that interest to that point.

I think on some mortgage and loans that you can access by website always display a “final payment” — the exact amount you would pay if you decided to pay the entire thing off TODAY. It’s just adjusted so that the interest rate is applied for the exact number of days.

Another benefit of rounding up is that if you round up enough you will get paid ahead on the loan. I don’t count this is develpoing my e-fund, but it is something that I keep in the back of my mind as an extra level of security.

My truck is paid ahead 4 months, the student loans years ahead, the house 1 month. I know if something bad happens, I don’t HAVE to make a payment.

@Michele – My wife used to do the same thing with paying bills ahead and it always drove me nuts too. Paying ahead on loans = good. paying ahead on bills = not so good…

Great post! I love the scenarios! I might start doing this with our mortgage. We bought a car last year and owe $182 a month. I’ve been paying $200 every month just for sh$%s and giggles. This motivates me to see how much I’ll save over the course of the loan by doing this. Thanks!

Sandra – I saw that tip somewhere and it can get unwieldy towards the end of your mortgage when the proportion that goes to principal gets large, but it works REALLY well in the beginning.

I do something like this with all my bills….

I estimate the most it’ll ever be per month (makes a huge difference on winter/summer gas bills).

Round up to the nearest 5$, and total it all up.

That amount is transferred in our joint account where all the automatic bill withdrawals come out.

Once a year we take the excess and pre-pay our mortgage. If bills are lower, we save more, and we always have a bit of a cushion sitting around in case a bill is much larger then expected.

Craig – does that still work if you have notified the creditor that you want to apply the extra to principal? Because I’m pretty sure with my mortgage (and the student loans that I rounded up on) I was still required to make my payment the next month even though I had accumulated enough extra to cover it. I would recommend people verify how their loan would handle this.

Another term for “final payment” is “closeout balance.”

this is a good idea for those who cannot pay various bills in full. it’s always always helpful to pay more than the minimum.

What’s with all this “sending in the mortgage payment?” Isn’t it set up to be automatically withdrawn from your account every month?

Is this a Canadian/USAian thing? Up here, it’s standard for payments like that (mortgage, car payment, student loan, line of credit) to be automatically taken out of your account every month. There’s none of this business of filling out a cheque and mailing it in every month, or even going online and transferring the money. It’s all automatic. Is that not the case in the US?

Re: paying bills ahead. As a bookkeeper, it drives me nuts when people pay random amounts on their bills. It’s a lot of extra work for us-so please, don’t overpay your bills!

I disagree. Overpaying bills is better from a consumer standpoint because you’re minimizing the risks in our current culture of obscene penalties for minor infractions. But a word of caution: if you have both credit card debt and mortgage debt payments to make each month, overpay very little on your mortgage in comparison to the other outstanding debts.

I want to caution people about overpaying student loans: be 100% sure that your overpayment goes to principle. I paid $300 on a $215 payment for 2 years. ALL the extra went to interest, which under my structure wasn’t yet calculated. So, I basically just gave Wachovia a $2040 bonus which had no effect on my amount due. I’d been having it deducted automatically and never looked at my statments, so I didn’t understand what was happening until I got the statment for taxes this year. Color me livid. Wiser now.

I agree with DebtGoal. Back in the days before online bill payment was widely available, I used to pay my phone bill at least a month in advance so that I’d have a buffer if my check got lost in the mail (or in case I spaced out and forgot to send it in).

Tea, people who overpay their bills have their reasons. If you feel your workload is too high, petition your employer to hire more staff. Don’t expect other people to want to inconvenience themselves to make your job easier.

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.

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

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.

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.

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.

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.

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!

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.

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!

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.

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.

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

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.

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.

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.

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.

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

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.

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

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.

Dear Rick #18, Most people are better off getting this guaranteed 5% return without paying taxes on the money than the return they will get AFTER taxes on investments. And most people will NOT get an 8% return (taxable) at this time. They are getting 1% or so on CD’s. This is a guaranteed, tax free 5% income through not having to pay the money. It is secure. The stock market is not secure, and the rate of return varies widely.

Thanks for providing examples which makes it more clear to understand. It can definitely make financial payments easier and more recordable. Plus, you will be able to save money in the long run.

Great article and idea.