Monday, December 10, 2012

Pennies and Nickels: A "How To" guide for gaming the system

Update: So it turns out that my original source wasn't as reliable as I thought. Sorry about that. The US isn't actually stopping production of the penny and nickel. Canada is getting rid of the penny, though, and the US should really get on the ball. I'll leave this article up, though, because it was a lot of fun to write and our "get rich slow" scheme still works in Canada. Sort of.

You may have heard that this coming January the US will stop production on pennies and nickels. Here's a quick video to get you up to speed on how the change will take place (the video is for Canada, but the idea is the same).

So the penny and the nickel are gone now.

The question I immediately had was: is there any way we can make some money from this change? I was talking with some friends (after reading this great "What-if" by Randall Munroe") and here's what we came up with:

The Background
First off, we need to exploit the way that pennies and nickels are rounded. This means that every transaction we make must be made using cash. Using a credit or debit card will mean that no rounding happens and nothing is different. When you purchase with cash, though, the total will be rounded to the nearest 10 cent increment. Also, we'll assume a sales tax of 6.25%. The idea is the same if you have a different sales tax, you'll just have to recalculate to make it work.

The Purchase
To make this work we need to buy something that will round down. Then, we need to return it in a way that it will round up, leaving us with a net profit. Of course this profit will be small, but if we do it hundreds of thousands of times we'll be rich! We'll want to buy something small so we don't have a big upfront cost. Let's buy a 98 cent candy bar. With sales tax this comes to $1.04, and rounds to an even dollar. We'll say that we have an starting investment of $100,000, so can we buy 100,000 candy bars. Remember that you'll need to buy these one at a time, though. You need to make sure every purchase rounds off 4 cents per candy bar.

The Return
Ok, so now that we've spent $100,000 on candy bars we're ready to cash in. We purchased these candy bars one at a time so if we return them one at a time we're right where we started (minus the time you spent). However, if we return them all at the same time, the total comes to $104,125 - we've just made $4,125! This may only a  small return on your investment, but it's a guaranteed return. And it was all made possible from one little rounding error (actually, from 100,000 little rounding errors).

But we're greedy, so let's not stop there. Let's maximize the rounding error by only returning two candy bars at a time. Each return comes to $2.08, which will  be rounded to $2.10. This means that for every candy bar you bought you made 5 cents when it was returned. By the end you'll have an extra $5,000 in your pocket.

The Catch
By now you might be yelling at me through your computer that this plan won't work. If you are, you clearly don't understand the satire of this article. I'll admit it, our plan has its flaws. One obvious problem is that you'll either need a cashier that's in on the con or that is so completely naive that you'll be able to buy 100,000 candy bars individually and return them in pairs. The second problem is you'll need time, and time is money. To purchase 100,000 candy bars individually you'll need to call in sick 52 days in a row. Then, to make our returns, we'll need another 26 days.1 In all we'll have to take off 78 days of work to make $5,000. If you make anything over $8/hour you'll lose money with this plan.2

So is there any way to salvage our plan? Well, instead of spending all day buying candy bars, what if we just buy one candy bar a day? Then, we can return them all at once after one year. Using this plan you'll make considerably less - only $15.06 per year - but at least you won't have to spend 78 continuous days in line at Wal-Mart, right?

[1] This is assuming you can do four transactions per minute and only "work" on making those transactions for 8 hours a day. The guy in line behind you is going to hate this schedule.
[2] As a graduate student this sound like a great idea. $8/hour, are you kidding me? People actually make that much money? 

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