Set your own buffer to avoid the overdraft trap
8% of UK adults - 4.3 million people - are constantly overdrawn, or usually overdrawn by the time they’re paid
Written by the Debt Freedom team 3 min read
Before you can build anything, you need to know what's actually happening with your money.
An overdraft feels like a shoulder to lean on, but it's an expensive one and the longer you lean on it, the more normal it feels to live below zero. The good news is you can replace it with something that costs you nothing: your own buffer. Here's how to get organised and build one.
Start by getting organised
Before you can build anything, you need to know what's actually happening with your money. Getting organised is important, and it doesn't need to be complicated:
- List every bill and its date. Write down everything that comes out of your account each month - rent or mortgage, utilities, subscriptions, insurance and when it leaves.
- Line your bills up. Where you can, have them all coming out from one place and at a similar time of the month, ideally a week or two after payday. Once they're paid, you know there isn't anything else until next month. That alone reduces the mental load.
- Know your number. Add up your essential outgoings. That figure (what your month actually costs) is the foundation for everything else.
Having two accounts, one for bills and one for spending, separates your intension nicely. Each will need its own buffer.
Build your buffers, one small step at a time
Your buffer is simply money that sits in your account and doesn't get spent. It does the job the overdraft was doing, except it's yours, and it's free.
- Start small. Even £50 changes things. Your first target, is simply getting your account balance to stop touching zero.
- Move it out of sight? You could put the buffer in a separate savings account but what you really need is self-control. If your buffer is £500 and you have that in your bills account - just don't touch it. It isn't yours to spend. The interest in any other savings account could never compete with the 39% interest of an overdraft.
- Pay it first. Hopefully, your salary will be paid directly into your bills account. You will know how much you need to keep in there. You could think of the money you transfer to your spending account as a bill.
Redirect what the overdraft was costing you
Here's the part that makes this sustainable. While you were using your overdraft, you were already paying for the privilege (often around 39% interest), quietly draining your account every month.
By not being overdrawn, it makes it easier to stay out of the overdraft in the future. The money you are saving helps you keep your own buffer, full.
When the buffer is in place
Once your account is sorted, you should have money left over. That would go into your one month starter emergency fund, paying off any debts or to build a full emergency fund.
If your buffer (before payday) dropped below your target. You need to take action, look at your spending, lower your essentials, cancel things - it's your job to stay in control.
The bottom line
An overdraft is the bank's buffer, rented to you at a high price. Get organised, start small, and redirect what borrowing used to cost you. In a few months you'll have built your own and this one pays you back in peace of mind.