Nearly there - What would you do?

SteveW81

Hey all,

So my wife and I have been working hard over the last few years to become debt-free after many years of irresponsibility. We no longer have any personal loans or credit cards. We do have a mortgage and a couple of PayPal pay-in-3 agreements, but the figures are all smaller and manageable.

The issue we have now is getting out of our overdraft. The OD limit is £2.5k, and we end up approaching the £2k mark each month. We both work full-time and bring home decent salaries, but even with cost-cutting, we just don't seem to be able to dent the OD, and of course get interest charges each month on the OD.

I have a Lifetime ISA with circa £2.1k saved, and I'm aware I'd lose 25% on any withdrawal with the Government clawback.

My question: Should I withdraw the full savings from my ISA, without closing it, and put it towards reducing the OD?

TIA, and any views and guidance appreciated.

EssexHebridean

Ugh - the OD should have been the first thing to be tackled, it's fortunate that it hasn't come back to bite you before now! 

Allowing that it hasn't, I'd treat it as your priority debt now. Don't withdraw from the ISA - that is also your only emergency fund by the sound of it, you need to keep that, albeit it isn't in the best place really. 

Allowing you have finished clearing other debt, you must now have surplus income each month - where is that currently going? You need to ensure that surplus stays in the account with the OD - then over a few months that will naturally reduce the amount you are overdrawn. At the point where you end the month not overdrawn, that surplus can then be moved across to an interest-bearing savings account.

It sounds as though a new SOA might be a good step forwards for you at this stage. 

tacpot12

I agree with EssexHebridean. When you  are able to make a dent in your overdraft, I'd recommend asking your bank to reduce your overdraft to some new, lower, but workable level. e.g. £1000, and then £500 (so ratchet it down). Having the bank enforce good habits through a low OD limit is one way to really make your bank work for you, rather than the other way around!

Once you have sorted the overdraft, saving to overpay your mortgage will give you more flexibility and a larger emergency fund. 

And, well done for making it this far. You are nearly there! Keep up the good work. 

SteveW81

Thanks for the reply EssexHebridean. I appreciate you taking the time.

You’re right that the overdraft should really be the priority now, and that’s exactly why I’m questioning whether a lump-sum hit (even with the LISA penalty) might help reset things.

One point to clarify, though: the LISA isn’t our only emergency buffer, but it is the only pot of money of that size sitting there The challenge we’re finding is that, while we technically have surplus income on paper, it keeps getting eaten up by timing issues, irregular costs, and overdraft interest, so the balance never really comes down month-on-month.

We’ve already cut back hard and cleared everything else, so this feels like the final sticking point. I completely take the point about not raiding long-term savings lightly, and I’m leaning towards keeping the LISA intact.

A fresh SOA is probably sensible at this stage; we haven’t done one since clearing the last of the cards and loans.

Thanks again for your perspective.

SteveW81

tacpot12 said:

I agree with EssexHebridean. When you  are able to make a dent in your overdraft, I'd recommend asking your bank to reduce your overdraft to some new, lower, but workable level. e.g. £1000, and then £500 (so ratchet it down). Having the bank enforce good habits through a low OD limit is one way to really make your bank work for you, rather than the other way around!

Once you have sorted the overdraft, saving to overpay your mortgage will give you more flexibility and a larger emergency fund. 

And, well done for making it this far. You are nearly there! Keep up the good work. 

Thanks, tacpot12, that’s a really helpful suggestion. I like the idea of ratcheting down the overdraft limit rather than relying on willpower alone, and using the bank’s limits to enforce better habits makes a lot of sense.

Once the OD is under control, the plan is to redirect that money into savings/mortgage overpayments to rebuild flexibility and an emergency buffer.

Appreciate the encouragement, too. It does feel like the last hurdle now.

ManyWays

If you have cleared loans and credit cards, you normally have some surplus each month that was previously paying those debts?

EssexHebridean

SteveW81 said:

Thanks for the reply EssexHebridean. I appreciate you taking the time.

You’re right that the overdraft should really be the priority now, and that’s exactly why I’m questioning whether a lump-sum hit (even with the LISA penalty) might help reset things.

One point to clarify, though: the LISA isn’t our only emergency buffer, but it is the only pot of money of that size sitting there The challenge we’re finding is that, while we technically have surplus income on paper, it keeps getting eaten up by timing issues, irregular costs, and overdraft interest, so the balance never really comes down month-on-month.

We’ve already cut back hard and cleared everything else, so this feels like the final sticking point. I completely take the point about not raiding long-term savings lightly, and I’m leaning towards keeping the LISA intact.

A fresh SOA is probably sensible at this stage; we haven’t done one since clearing the last of the cards and loans.

Thanks again for your perspective.

This underlines the  need for a new SOA - it sounds like your budgeting has slipped a bit - and budgeting is not only the thing that gets you out of debt, it is also the thing that KEEPS you out of debt going forwards! 

The issue with paying that OD off without dealing with the budget is that before all that long you'll find yourself back in it again, and - worse - without that money in savings! 

As for the LISA - in your shoes I would be hoping for a change in the rules that means you are able to transfer it to a normal ISA at some stage without the penalty. It's really not a good savings vehicle for someone who isn't going to be buy a suitable property. for now though, allowing you have the money there, it may as well stay there. Remember if you take the money out now, it's not just the government bonus you will lose - it's some of your original capital as well. 

Brie

Well done for the progress made so far.  I'm seconding (thirding?) the call for another SOA.  Even if you don't show it to us you need to reflect on how you've been successful so far and put those practices back into play.  Frankly we should all do that occasionally just as a reality check on our spending.   I last did mine.....ummmm....oh never mind.

Have a think too about where new money might be found.  I always used to get a pay rise and a bonus (if I was lucky) around this time of year.  It's great to blow that on something nice but the nicest thing you could do for yourself is put it towards kicking your OD to the ground.  

Best of luck!!!!!

InDebtEnby

You could always open a different bank account and see the overdraft as a debt like a credit card, where you pay off the interest plus extra every month. If you set up a standing order then it would take care of itself in the background. Having a separate account also shows what your actual balance is and not suggest that you have more.

RAS

InDebtEnby has a good idea but I'd check the terms of your bank account first. Some demand payment of a salary and a couple of DDs as conditions. So if you stop paying in they can demand the whole OD is repaid.

The other option is that you open an instant ISA and set up a DD that goes out immediately after your salary arrives. That becomes your emergency fund.

I'd also suggest the new SOA, maybe looking at bank statements for the last few months to see where the leakage is? And also review all the DDs as you may be on auto-renew on insurance and the like and checking around could save you a bit each month.

But your SOA needs to have allowances each month for things like medical and dental, normal house maintenance, as well as treats. If the money is not there when you want it, I'd suggest opening something like Starling with pots and putting away money for each category each month. So the MOT and boiler service are sitting there, not another panic.

And look around the house to see if anything can go on Vinted etc, even a car boot when the weather improves. You might be able to knock a bit off the OD and then reduce the limit?

Best of luck.

zedonk

You've done really well to pay off your cards and loans, so I'm curious what makes the overdraft harder. Has your income or expenses changed, is your motivation flagging, or is it because it's an overdraft so it's harder to see what you owe?

Maybe as a variant of InDebtEnby's plan, you could keep your salary and DDs in that account, but have a separate account for all your variable spending. Then each month, transfer out what you can afford to spend, leaving enough for your DDs, the interest and a set amount that you pay off the overdraft.

An SOA will help you see what you can afford.