A recent article at My Dollar Plan caught my eye: A Penny Saved is ... $6,977.03! This article points to the essay Every Penny Counts by Scott Bilker.
Bilker shows that if you increase payments on a long-term high interest debt by just a penny each month, big savings result. Starting with a $10,000 loan at 1.5% per month, the interest is $150 per month. The minimum you can pay and still have the loan paid off eventually is $150.01. But this will take about 54 years. Increasing the payment to $150.02 saves you $6977.03 over the life of the loan. Just a penny per month makes a big difference.
Now I understand the point these authors are making: small amounts can add up. Ignoring small amounts each day can seriously hurt your finances over the long run. I’ve made the same argument myself in Small Amounts Add Up, but Pennies Don’t. As you can guess from this article’s title, I argue that small amounts add up, but pennies are just too small to amount to anything important.
But, doesn’t Bilker’s example prove the opposite? No, because it is too contrived. It just shows that you should avoid high-interest loans.
Let’s take Bilker’s argument to the next level. Suppose that you have a department-store credit card that charges 2.4% per month. You build it up a $10,000 balance, and then pay the exact amount of the interest, $240, each month. Your balance should stay at $10,000 indefinitely.
But, you didn’t notice a short paragraph in the fine print. There is a one-penny service charge each month. At first your balance goes up by a penny each month, but interest begins to compound over time. After 60 years, you finally notice that something is wrong. How much do you owe at this point? Drum roll, please ... $10,868,192.14!
Of course, this whole example was silly. Bilker’s example was less silly, but silly nonetheless. It’s about time that we eliminate the penny. The pennies that we hand back and forth in cash transactions can never amount to much. We would be just fine if all cash transactions were rounded to the nearest nickel, or even quarter.