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# Keep a Lid on Your Debt

Many people assume that they can afford something if they can simply make the monthly payments. But that's exactly the type of short-term thinking that will fetter you to a lifetime of interest charges on things that will break, wear out or become useless long before the last payment is made. Either that or you'll find yourself trapped in an "upside down" loan.

What's an upside-down loan, you ask? It's a loan in which you owe more money than the item is worth. That's the case for about eighty percent of new car buyers, who drive off the lot owing more on their cars than they can be re-sold for. They drive into the dealerships still owing substantial amounts on their trade-ins, and they compound the problem by financing their new cars for five-, six-, or even seven years. Those longer payback periods, combined with the depreciation rates of new cars, ensure that they'll be in that upside-down position for years.

So, is that such a big problem? Well, suppose you lose your job, or your car gets totaled and you can't get enough from your insurance to pay off the loan. You could still owe thousands, on top of being without transportation. One way to solve the problem before it ever happens is, of course, to pay cash for everything. This strategy has plenty of advantages, one of them being the magic of compound interest. Let's take a look:

Suppose Jim buys a car and finances it with a $20,000 loan. At 5% interest over a five year period, he'll make 60 payments of $377.42, for a total loan cost of $22,645.

Jane, on the other hand, decides to save up to buy her new car. She invests $294.09 a month for five years at 5% interest and ends up with $20,000 in cash -- but she only contributed $17,645 out of her own pocket. The rest of the money came from the compound interest paid on her savings!

The result? Jim pays $5,000 more for his car than Jane will pay for hers, a difference certainly not to be sneezed at.

As you gain more control over your credit and finances by applying the kind of discipline that Jane used, you'll become the type of savvy consumer who can pay cash for a car and other consumer purchases. In the meantime, however, you can save yourself a lot of money and potential headaches by using the "three-year rule".

The three-year rule is quite simple: don't borrow any amount of money, other than a mortgage or student loan, which you can't pay back within three years. Of course, this will mean larger monthly payments, but you'll end up paying considerably less interest both now and over your lifetime. You'll also substantially reduce the amount of time that you spend upside down on any purchase you make, even if you can't make a big down payment.

The payoff for all of this discipline, restraint, and hard work will undoubtedly be greater wealth, freedom and ability to get the loans that you need at the best possible rates, because your credit and spending will be well under your complete control. Instead of being at lenders' mercy, you'll be the one holding all the best cards.

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