A little research led me to a surprising discovery: Uncle Sam rounds down.
Yep, when answering a recent reader question, I discovered when you're retired and get an annual cost-of-living adjustment, your new check is always rounded down to the nearest dollar. That means whether the initial calculation results in some dollar amount plus 39 cents or that same dollar amount plus 99 cents, those pennies get rounded down the same way.
Over decades of retirement, guess who wins in that calculation?
So that got me thinking. Maybe we should all turn this phenomenon to our advantage by rounding up in a big way when it comes to our personal finances. Here are a few examples of what a powerful difference it could make:
Mortgage payments: The principal and interest payment on a $130,000, 30-year mortgage at 4% is about $620. Round up your monthly payment to $700 and you'd be done with your mortgage roughly 6 years early. Plus, you'd save more than $20,000 in interest. Whatever the size of your mortgage, rounding up would help you pay it off early. And if you end up selling the house early, rounding up could lead to extra money in your pocket in the short term.
Car payments: A $30,000, 5-year truck loan at 4.5% would come with a substantial $559 monthly payment. (Even though I'm tempted to stray, I'll stay on task and not delve into the dangers of too much car debt.) Round that payment up to $600, and you'll own the truck outright about 5 months early. And even though I'm sure you won't do this (hint, hint), if you sell or trade it in early, those bigger payments could provide a buffer to keep you from being upside down on your loan.
Credit cards: Round up a $25 minimum payment on your $5,000 credit card account to $100 and you'll knock off 17 years and save over $5,000 in interest. If nothing else, this example provides a cautionary statement about making the minimum payments on your credit cards.
Monthly investments: The round-up approach can also work for your saving and investing. Let's say you bump up your monthly TSP or Roth IRA contribution from $150 to $200. In 30 years, with a hypothetical 7% return, you'd have more than an additional $60,000 stashed away! And that's not even accounting for the fact that you'll increase what you're putting away by saving a portion of each cost-of-living or time-in-service pay raise or promotion pay increase along the way.
So, there you have it. Take the round-it-up approach and you'll be on the road to marginalizing Uncle Sam's sneaky technique.