Updated on 09.16.14

How To Budget Money While Making Debt Disappear

Trent Hamm

Many of us that have moved to online banking have our regular payments plotted out to be paid automatically, so we don’t have to worry about filling out the form each month to cover our student loan payment or our mortgage payment. I did this myself a few years ago, setting up four regular payments online so that they were just taken care of. I got out the statement for each one, entered the necessary information, and put in the monthly loan amount. After that, it was just automatically paid every month. Out of sight, out of mind, right?

Let’s look at an example based on some information sent to me by a reader, who we’ll call Joe. Joe pays $97.69 a month on his student loan debt, a loan of $12,600 at 7% interest locked in. He’ll be making payments every single month for the last twenty years.

What happens if, say, you just rounded that amount up to the nearest dollar. If Joe sets up that automatic payment to be $98 a month, which would equate to putting $0.31 extra every month. At the end of the debt, he doesn’t have to make the last payment and only pays $34.88 for the payment before that to finish off the debt. By paying $0.31 each month for twenty years, totaling $74.09, you actually pay $132.57 less over the life of the loan. It’s basically an effective, automated way of having a loose change cup.

Let’s say he decided to make that amount an even $100 each month, which amounts to paying $2.31 extra each month. This results in having the loan paid off a full year early, excepting one final payment of $33.47. Over the life of the loan, you would pay $526.68 in extra payments, but at the end of the loan, you wouldn’t have to make the final $1138.81 in payments.

There’s another subtle benefit as well: if you round up to an even number like this for your extra payments, it becomes very easy to calculate required expenses for the month, even without the aid of any calculators. In this example, it’s very easy for Joe to know that $100 is going to go away each time around. In the past, he might have just estimated the $97.69 as being $100, but by making that estimation a true amount, he’s not only making the thumbnail calculations more accurate, he’s saving himself some decent money in the long run, too.

Is there a drawback? You could arguably make a little more by saving the small difference rather than using it in this way, but the difference is trivial and if the interest rate on the loan is high, it might be an even better use of your money to pay ahead. Either way, given the convenience of using rounded numbers and the fact that both ways put you money ahead, it’s worth the fractional amount that you might lose.

I use this very approach on my two student loan payments, even though they’re locked in at a very solid rate. It simply makes calculating easier and the difference between the actual payment and my slightly higher modified payments is basically pocket change, plus, over the long run, it saves money. Sounds good to me.

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  1. Justin Pardee says:

    Cool, I’ve been considering the benefits of doing just this – and you just pushed me over the edge. Thanks!

  2. Patrick says:

    I do the same thing with my mortgage payment. Instead of paying $1508.xx, I pay $1550. It is easier to remember, and when I plugged it into a mortgage calculator it save me a few months payments over the course of the loan. I always like to pay a little extra if I can afford it. :)

  3. We have 140 grand in student loans locked in at 2.6%. I think in my case, it’s better to just pay the exact monthly payments and invest the extra money.

  4. Trent Hamm Trent says:

    Would you actually invest the odd $0.36 or buy half of a candy bar?

  5. Ted Valentine says:

    I like the idea of doing this to my mortgage. I never can remember exactly what the amount is when budgeting. And I like round numbers when budgeting so it doesn’t get so nitty gritty. Good post.

  6. Ted Valentine says:

    BTW I just calculated if I do this by adding $ 3.79 (rounding up to the next “10”) for the remaining term of my mortgage, I’ll save $2,263.11 in interest alone. Sweet.

  7. martha in mobile says:

    I do this on my mortgage. It’s making a 15 year mortgage into a 13 year mortgage. It’s easy, feels virtuous and it’s fun to play around with in a spreadsheet. What could be better?

  8. Erin says:

    It’s a good plan, IF your lender actually applies it to the principal. One of my husband’s payments was applied to the wrong loan (the lender uses the same number for all the loans, so it’s confusing). Instead of applying the payment to the principal, they just applied the one payment as four month’s worth of future payments.

  9. Laura says:

    Hey trent!

    Thanks for the advice. I’ve been using this method. It’s alot easier to budget now.

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