Personal Finance: Rounding Up Debt Payments

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.