Yahoo just posted an article (http://news.yahoo.com/blogs/sideshow/man-makes-final-house-payment-pennies-144051687.html) about a man who made his last mortgage payment of about $62,000 in pennies. While this has a certain element of being neat, it’s also utter stupidity. And of all the comments I read, everyone is cheering this phenomenon like it’s one of the most suave financial moves they’ve ever seen.
You do not need a business degree to understand the flaw in logic here. There’s a little thing called compound interest that’s been forgotten about courtesy of Ben Bernanke’s Zero Interest Rate Policy that’s been in place for the past several years. For those people who existed prior to 2008, there was a time where you were actually rewarded for saving. Below is the information provided in the article:
Home purchase date: 1977.
Length of mortgage: 35 years.
Final Payment: $62,000.
Aside from the fact that they didn’t make 35 and 40 year loans back in the 70’s, I’ll make the assumption there was a refinance or two along the way. And other than the fact that 492 pennies every single day is quite a lot, I’ll also assume the numbers provided are legitimate.
On to the math. The standard formula for future value is 1 + I^N, where I is the interest rate per period (typically months), and N is the number of periods. If you prefer T instead of N, go for it, it’s still a free Country for a little while longer. I will also assume that an equal number of pennies were saved every day over the 35 year period, and a monthly deposit of $147.62 was made. While there’s no way this is perfectly accurate, it’s a pretty good proxy considering the time frame involved. I also have to find a reasonable interest rate to use as the compounding factor. I decided the 6 month CD rate based on the Federal Reserve Board’s historical values (http://www.federalreserve.gov/releases/h15/data.htm) was the best rate to use for small amounts of savings by an individual.
Based on this math, which may be plus or minus a few bucks, those pennies would have grown to around $166,451 by the time they made their last payment. So this great financial achievement really resulted in leaving $104,451 on the table. There are various other factors that could have affected this number such as taxes, the rate at which the pennies were saved, which investment vehicles were chosen, etc., but let’s call it a cool $100,000 which was not received by this family.
It’s not the fact that the family missed out on this $100k that disturbs me, but rather the dozens of comments I saw saying “good job” or “way to pay off your house”, and phrases to that effect. I would never be condescending towards someone who chooses to save. I would rather be condescending to those people that don’t do it, and don’t realize the opportunity cost that they’re missing. Perhaps in our public schools we should teach Personal Finance 101 instead of the mating habits of South African Armadillos.