Ask Stacy: What’s the Single Best Way to Pay Down Debt?

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Here’s a question that gets asked a lot this time of year…

Dear Stacy,
Long-time reader, first time question:
Like many people, I make resolutions every January just to see them forgotten before the month is gone. For example, paying off debt. So this year, I’ve decided to do something different, and that’s to ask you for your single best idea to help me pay off all of my debt this year. Can you help? Please answer!
– Jeff

I can definitely help, Jeff!

As we do every year, we’ll be publishing several articles this week specifically designed to help you achieve just about any financial resolution. Yesterday we did an article on budgeting, and tomorrow we’ll have one specifically about dealing with debt. But since you asked me for my one best idea, here it is – and it applies to any goal relating to money.

The single best way to find the money to destroy debt is to use a site or app that automatically tracks your spending.

How keeping track can change your life

Ever hopped in the car and started mindlessly driving around, assuming that sooner or later you’d arrive at an awesome destination? Probably not. If you want to be somewhere awesome, step one is deciding exactly what destination would be awesome. Step two is to find the shortest path to get there. For this you need a tool: a map, or more likely these days, the GPS on your phone or dashboard. Mapping helps you find the shortest path, stay on course, and see how close you are to getting there.

Goals and New Year’s resolutions? Same thing. They’re destinations: awesome places you want to go. Step one is deciding what’s awesome. No debt? Your first house? Ten grand in the bank? Whatever it is, you have to know exactly what it is if you’re going to get there.

Step two is finding the shortest path. As with driving, it requires a tool: a spending plan. A spending plan is nothing more than a detailed look at money coming in and going out, along with your financial goal.

Tracking your expenses is like using a map: It allows you to instantly see where you are, how close you are to your destination, and the speed at which you’re approaching. It keeps you focused to avoid getting sidetracked. It allows you to see roadblocks – wasted money – that are slowing you down.

The GPS of debt destruction: automated expense tracking

In the days before computers, there was only one way to find the shortest path to a destination: paper. If you were driving, you used a paper map. If your goal was financial, you used a paper worksheet to track your income, expenses, and progress.

Then computers came along and provided some help. For driving, you went to a site like MapQuest and told it where you were and wanted to go – then you’d print out the directions. For financial destinations, programs like Quicken would keep track of your income and expenses, but only after you manually input everything you made and spent.

Now both are way more automatic and infinitely more useful. Today your car (or phone) knows where you are – you just tell it where you want to go and it tells you how to get there.

When it comes to money-related destinations, same thing. After some setup, today’s sites and apps know what your goals are and where your money is. They automatically keep track of everything you make and spend. They make suggestions to help you reach your goals faster and allow you to see exactly where you are 24/7.

How to use automatic expense tracking

Automated expense tracking sites and apps are typically free. Look for one that will help you:

  • Set goals. For example, if Jeff wants to pay off his Visa bill, he can tell his app and it will help him find ways to do it.
  • Track everything you spend. At a glance, you’ll know what you’ve spent on eating out, gas, groceries, entertainment, etc. Seeing expenses in black and white allows you to find places where you can cut back and find extra money to reach your goals faster.
  • Keep you from paying late. Once you tell it what your bills are, the site or app will alert you when one is due. You can also get alerts whenever you spend over a certain amount, have a low balance, etc.
  • Show you deals. Since these sites and apps analyze your spending, they’re in a good position to help you spend less. For example, if you’re paying 6 percent on your mortgage, they might suggest a lender that will help you refinance to 5. Or if they notice you like eating out, they might send you a coupon to a restaurant.

What’s the catch?

While most budgeting apps are free, they do make money from the deals and suggestions they offer. For example, if you refinance your mortgage with the lender they suggest, they get paid. If you use the restaurant coupon they email you, they get paid.

There’s no harm in someone sending you a coupon or suggesting a certain lender to refinance: you’re not required to act on these offers. Just remember that’s how these sites and apps make money and treat their advice accordingly. If they suggest you should refinance, for example, don’t just blindly follow their advice: Do your own lender comparison.

Which one is best?

We recently formed a partnership with a company called PowerWallet to provide this service to our readers. I personally know the people behind PowerWallet and I use it myself. It’s secure and it’s free. I hope you’ll try it, but there are others: Mint.com and budgettracker.com, to name a couple.

Bottom line? If you’re like Jeff and this is the year you’re determined to achieve your financial goals, my single best bit of advice is to try automatic expense tracking. It won’t take a long time to set up and offers the best way to stay on track.

(Disclosure: We get a small referral fee when you set up a PowerWallet account – but that’s not why we’re suggesting it.)

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