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

Photo (cc) by quaziefoto

Here’s a question that gets asked a lot this time of year, as the high hopes we express as New Year’s resolutions begin to fade:

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 at the beginning of every year, this year we published several articles specifically designed to help you achieve just about any financial resolution. We talk about things like destroying debt, creating a budget you can live with and getting help. But since Jeff asked me for my single 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 website 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 fits the bill. 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? 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 define it 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, the only tools to find the shortest path to a destination were on 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 tools 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 exactly how to get there.

When it comes to money-related destinations, same drill. 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.
  • Avoid 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.
  • Discover 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 percent. 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?

A few years ago, we started recommending 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 shortest path to your awesome financial destinations.

Got a question you’d like answered?

A great way to get answers to just about any money-related question is to head to our Forums. It’s the place where you can speak your mind, explore topics in-depth and, most important, post questions and get answers. It’s also where I often look for questions to answer in this weekly column. You can also ask questions by replying to our daily emails. If you’re not getting them, fix that right now by subscribing here.

About me

I founded Money Talks News in 1991. I’ve earned a CPA (currently inactive), and have also earned licenses in stocks, commodities, options principal, mutual funds, life insurance, securities supervisor and real estate. Got some time to kill? You can learn more about me here.

Got more money questions? Browse lots more Ask Stacy answers here.

Disclosure: The information you read here is always objective. However, we sometimes receive compensation when you click links within our stories.

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