Get Me Out of Overdraft!

I get letters every week from people seeking help to get out of debt. A lot of those people have overdraft protection and spend more time in overdraft than out. They see that OD as a barrier to getting started on a budget, typically saying something like, “How am I supposed to make a budget work when I’m already working with no money because I’m in overdraft?”

Overdraft is just like any other debt. Instead of looking at it like a cash flow issue, see it for what it really is: DEBT! And it’s very expensive debt that will bugger up your sense of being balanced financially. If you want to get out of overdraft and back into the black as quickly as possible, it’s gonna take some belt-tightening.

First, list your monthly Fixed Essential Expenses. These are the bills that you have to cover every month like your mortgage or rent, transit costs, your minimums on your debt and your childcare expenses. Total it up.

Next, list your monthly Variable Essential Expense. These are the costs that you simply can’t avoid, like food — we’re talking the bare minimums to get you through the month, so you’re going to use up every macaroni noodle, every freezer-burned piece of chicken, every cookie, rice grain and canned whatever you have in the cupboards. There’s no clothing, no movies, no extras at all on this list. Total it up.

Subtract these two totals from your income. How much do you have left? If you have barely enough to cover the essential expenses in your life you can see why you’ve been having a problem.

Now you have to decide how quickly you want out of overdraft for good. Six months? Then divide your overdraft balance by six and that’s how much you’re NOT going to spend each month so you start reducing your OD balance.

I don’t care if you don’t have the funds to cover all the Nice-to-Haves – cell phones, cable, shoes, sushi – you’ve loaded into your spending. If you want to eliminate your overdraft – if you’re serious about living within your means – it’s time to cut back until you’re out of the hole.   Change your services to the most basic you can get away with or ask that they be suspended for a couple of months.

You’re not allowed to use your credit during this process. You are, in essence, having a No Shop Month. If a month of austerity doesn’t get you back into the black, you’ll have to live through this belt-tightening horror for another month (or four) until your bank balance can stay in positive territory.