does--especially when you're paying back debt.
How many times have you walked out into the parking lot of a
supermarket and spotted a penny on the ground? Plenty of times no doubt. You might bend
over to pick one up if you see Lincoln staring at you, but for the most part you just keep
I mean, after all, with the cost of inflation over the years,
what is a penny worth? It really isn't worth that much as far as buying something tangible
like a television, is it? What's a penny going to add toward that purchase (besides one
I remember when, for a penny, you could get a gumball. My
father can remember going to the movies for pennies. Now people leave their pennies at the
counter of the convenience store to help the next person balance their transaction. And
why? So they don't have to get any pennies in their change! My point is that the penny
doesn't seem to have much value, but it certainly has value when you're dealing with your
When it comes to paying back your debt, a penny can mean a
lot. Applying one extra cent to each payment can make a significant difference in how much
you repay over time. Let's walk through an example that clearly demonstrates exactly how
valuable the penny can be.
The example loan is $10,000 at 18% and you're making monthly
payments of $150.
Question: How long does it take to repay this loan?
Answer: You can never repay that loan by making payments of
$150 per month. No matter how many payments you make, you will always owe $10,000-forever!
Why? The amount of monthly interest is exactly equal to how much you're paying. That
monthly interest fee is $150 ($10,000 x 0.18¸12). You'll never owe any more than $10,000,
but you'll never be able to pay off the loan.
Next question: What happens if you add just one penny to that
payment? Just one cent? That's right, now the payment becomes a big $150.01. Now how long
will it take to pay back that loan?
Answer: It takes 53 years, 10 months! Okay, that's a lifetime
for some people, or at least half a lifetime. Now, because of that one penny, instead of
paying $150 for eternity, the loan is eventually paid off.
Okay, so you don't want to be in debt for almost 54 years.
What can you do?
You guessed it. Add another penny. So here's the next
Question: How much do you save by making payments of $150.02?
Answer: It now takes exactly 50 years to pay back the loan!
That extra penny knocked almost 4 years off the payback time of the loan. How much money
did that extra penny save? Let's see. The out-of-pocket cost of the first loan is $150.01
for 53 years, 10 months. That comes to a total repayment of $96,884.72 (the last payment
is less than $150.01).
With the extra penny, payments of $150.02 for 50 years, it
costs a total of $89,907.69. That's a savings of $6,977.03! Quite a bit saved just for
adding a single penny.
Think about this
by increasing the payment from $150.01
to $150.02, you are adding one cent for 50 years. Well, 50 years is 600 months (600 extra
pennies) or an out-of-pocket increase of just $6 over the course of that time in order to
save $6,977.03 in the end. Pretty neat-I think.
Okay, I hear the arguments mounting. "But Scott, that's
a crazy example, who's really going to get a loan for 54 years?"
My answer is that many people are doing it right now! How? By
making the minimum payment each month. If you charge $8,000 on a credit card at 19.8% APR
(annual percentage rate) and continuously make the minimum payment, it takes 54 years to
pay it back!
Remember, the bottom line is the more you can pay back, early
on, the more you can save in the end. So the next time you see a penny laying in the road
somewhere, you may want to think twice before passing it by.