How Do Banks Handle Rounding?

Most people understand what it means to round something to the nearest dollar. The concept of rounding is a valuable estimation strategy for splitting the dinner bill between friends or creating a monthly budget. However, not everyone is aware that bankers use a slightly different system of rounding, called bank rounding.

How Does Rounding Work?

Standard rounding is the rounding system taught in elementary school. One must round up to the nearest whole number if the last digit of the number is less than 5 and round up if the last digit is 5 or more. When rounding to the tenths place digit, the number 34 would be rounded to 30. The number 35 would be rounded up to 40.

In money terms, people often round numbers up to the nearest dollar to make quick mental calculations. So, $34.68 would be rounded up to $35.00. Money figures are always rounded up to the nearest dollar in some instances, regardless of whether the decimal amount is above or below five. So, $34.14 may still be rounded up to $35.00. This type of rounding is expected in the tax and accounting field. According to the experts of SoFi, “Roundups are a way to help you save automatically – every time you spend using your SoFi debit card.”

Unlike standard rounding, bank rounding entails rounding the number to the nearest even integer. Furthermore, it can only be applied to sets of numbers ending in 5. So, the number 14.5 would be rounded down to 14 because 14 is the nearest even integer. The number 0.5 would be rounded down to 0. Note the difference from standard rounding, which would round 14.5 up to 15. Standard rounding would be used with numbers that don’t end in 5.

When Is Bankers Rounding Used?

This rounding system is most often used when dealing with dollar amounts, hence the term. Because it’s only applied to sets of numbers ending in 5, it’s very adaptable to performing calculations that revolve around money.

This rounding system also narrows the margin of a possible rounding error. A rounding error is a discrepancy between the rounded and actual sum. In standard rounding, numbers ending in 5 are always rounded up, even though it’s equidistant between two round numbers.

Because of this, there is a high probability of a rounding error because the system is biased to rounding up to higher numbers. By rounding to the closest even number, banker’s rounding eliminates the implicit bias of standard rounding to produce more accurate numbers.

Which Is Better

In the end, any form of rounding makes numbers simple and easier to work with. It’s a tool for mentally estimating values, so whichever is more useful depends on the types of calculations being done. Because it produces more accurate results, bank rounding would be appropriate for general estimating finances and dollar amounts. You can find further information about rounding on reliable websites like SoFI Invest (SoFi Bank).

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