Overdrafts are sometimes a necessity but overdependence on them can be detrimental to your overall financial health. The interest charges could run well into double digits when you don’t pay off the overdraft when due.
The two main options available to people looking to avoid overdrafts are to increase income or to decrease spending. But the question is: which of the two option is more effective and realistic?
Increasing Your Income
This involves seeking other sources of earnings that can bring in at least the amount of money you tend to borrow each time as overdraft. It could be a second job or a new part-time business. You can also ask for a raise at your work place. The problem with this, however, is that many people are unable to increase their income at their current levels. Even when there is the will to take on a second job or to start a new business, there may not be enough time left after a typical work day to spend. Assuming there is enough time left, starting a side-business is demanding. Apart from developing a strong business plan, there will be need for capital injections which will only further drawdown finances. Properly planned borrowing can help get the business off the ground but there might still be need for regular financial inputs.
Decreasing Your Spending
This involves reviewing your budget each month and ironing out possible loopholes that may be guzzling your earnings. The budget review will highlight your debts, expenses and income. If you are paying too much on servicing your debts, you can consider renegotiating interest rates or taking a debt consolidation offer. With your expenses, you can carefully go through your bills to see if there are items that can be cut off your budget every month. Saving £10 on a specific aspect of your daily expenses might appear miniscule but it adds up quickly if you make similar savings on 5-10 similar aspects of your daily expenses. Your focus should be on reducing spending without adversely impacting your comfort. However, it is possible that you are already at your limits with reduction in spending. At this point, you may be better off seeking for new ways to bring in more income.
The best solution if you are seeking to avoid overdraft, therefore, is to combine elements of increasing your income and decreasing expenditure depending on your personal circumstances. Spend time to go over the two spectrums and work out how you can keep your financial health intact without regularly dipping into your overdraft allowance.