The Three Year Rule

December 18th, 2007 by David Weliver

Next time you want to buy something and you can’t pay cash, ask yourself: “Can I pay for this in full within three years?” I call it the three year rule, and if follow it, you will never find yourself overburdened by debt.

As I just wrote about in The Debt “Secret”, the longer you stretch out a debt, the more interest you pay, and the richer your lender gets. The industry knows this and does everything it can to keep you in debt as long as possible.

Fortunately, fighting back is simple. Avoid debt whenever possible, and if you can’t, try to pay off every debt you take on in three years or less.

Why Three Years?

Three years, or 36 monthly payments, is long enough to make most purchases affordable (assuming you can’t pay cash, you probably can’t pay over just 12 months either). But three years is also short enough that you won’t wind up paying outrageous interest.

If you have ever financed a car, you know that auto lenders give you the option of paying for your car over any number of years. The most common options are three years, four years, or five years, and in some cases even longer.

Every additional year you finance your car, stretch your credit card debt, or pay any other loan, you will pay hundreds, if not thousands, in additional interest. Although a car or other purchase may seem more affordable on a monthly basis if you have a lower monthly payment (thanks to a longer loan term), it’s smart to not think of what you can afford in terms of what you can pay each month. Remember, to become richer we need to spend less than we make each month.

If you’re shopping for a new car but find you can’t afford the monthly payments over three years, it might be a good indication you should look at a less expensive car.

Applying The Three Year Rule to Credit Card Debt

Credit cards are sneaky (which is why they’re so dangerous). Unlike a fixed-term loan with regular monthly payments, credit cards set no term in which to pay off a debt. The minimum monthly payments are the current finance charges due and a tiny fraction of the total balance. As you probably know, making only the minimum payments it will take you twenty, thirty, even forty years to rid yourself of a credit card debt.

That’s why, when tackling my credit card debts, I have tried to budget my monthly payments based on the goal of paying off each within three years.

If you’ve got so much debt you can’t afford to make the payments required to get out of debt in three years, start with the card with the highest interest rate, and aim to have it cleared in three years. As you can afford more, tackle others.

I’ve found that three years is also a time period that is not so long it makes me feel like I will be in debt for ever. It’s amazing how fast a year goes by in this busy life of ours, and you can look back and see your progress…almost a third of your debt is wiped clean!

Exceptions to the Three Year Rule

Granted, most of us can’t pay off a mortgage in three years. So the rule doesn’t apply to everything; but if you re-evaluate your debts with a three year goal in mind, you might be surprised how much you can accomplish in three months.

Three Years and Saving

The three year rule can also be a great way to plan out saving for a down payment or an emergency fund. Unless you’ve become extremely skilled at living below your means, it’s hard to accomplish many savings goals in just a year. If you save just $65 a week, however, you’ll have at least $10,000 in three years. Now that’s a fun goal to work towards!