Obliterate your overdraft for good!

There is unquestionably one tactic that's better than all others for getting out of your overdraft for good.

If you want to stop dipping into your overdraft for good, then there's one simple but important step you need to take: evaluate your shopping habits.

And the best way to do this is by keeping a spending diary for a month, and categorising all your transactions. If that sounds like hard work and you don't fancy writing down everything you buy for a month, you may find it easier to use lovemoney.com's brand new online banking service. This will categorise all your transactions from the last 30 days, so you can see at a glance exactly what you're spending your money on.

Why you should

A spending diary makes you more efficient with your money. You can see where - and how - you're spending on things that don't make you all that happy and where spending more could make you happier. You're better able to make decisions with it that maximise your resources and therefore your happiness.

Here's a real example of how it works (courtesy of my girlfriend), the difficulties you'll encounter, and why it proves useful.

Spending over one month

You can view your own spending in categories like these via our safe, online banking tool. You don't have to input any figures - we work it all out for you, based on your bank statements over the past month.

You can look at your spending over a longer period, but this one month should give you enough information by itself to make some of the changes you needs to achieve your goal.

Of course, getting the figures is easy. It's what you do with them that matters. So now, I'm going to look closely at a couple of items of interest in my girlfriend's spending diary:

Clothes and credit cards

I'm sure with many shoppers these two categories fit together like chalk and blackboards, or cheeseboards and cheese.

At first glance, my girlfriend spent just £66 on "Clothes". However, her next category is called "Credit-card settlement" and this was to clear the balance of £77. Turns out it was for clothes she bought in January. In March there are similar amounts in both categories, which confirms to her that in February she spent twice as much on outfits as she wanted and it's probably not an exception.

She now believes that she hadn't been thinking of her credit-card clothes shopping as spent money in the month she bought the clothes and neither did she think of it as spent money in the month she paid it off. That's how she has continually managed to spend double what she planned. This is a very useful revelation that just one month's assessment via our online banking service can reveal.

Her solution is a good one: if she buys clothes on a credit card, she will reconcile that under "Clothes" in the same month that she buys them, and not under "Credit-card settlement" in the following month. She will track her clothes spending in this way. All of it, not just the stuff she buys with cash or debit cards, which will show up on our online banking service.

(However, I suggest that, if you're repaying older debts over more than one month, this should still be categorised in online banking under "Credit card", "Personal loan", etc. Remember, you get to decide how to categorise your spending with our tool.)

Holidays

She logs just £15 for holidays. That wasn't because we went on the most penny-pinching holiday ever, but because she was saving over several months for some cheap flights. This is great, although she didn't save for the holiday expenses and, what's more, this reveals that she's not saving for any other trips - and she did take quite a few that year.

Thanks to her spending diary, she learned last year that holidays are something she needs to plan for much further in advance. To tackle that, she'll need to write a budget.

Taking it to the next stage

Thanks to her ability to track her spending, she now knows that her major spending weakness was caused by a blackhole in the way she thinks about credit cards and clothes shopping, and she can immediately eliminate that problem. She also knows that she'll need to write a budget to account for long-term things like holidays and perhaps healthcare costs, if she wants to begin saving and stop going occasionally into the red.

Make spending diaries and budgeting easier

Our Goals section here at lovemoney.com, helps you Write a spending diary and Make a budget, but as I mentioned earlier, you'll find it a great deal easier if you use lovemoney.com's protected online banking facility, which logs and separates your transactions for all your online bank and credit-card accounts, and compares your income to your expenditure each month. This secure facility is supplied by Yodlee, which provides services for HSBC, MSN, Royal Mail and dozens of other massive companies with financial operations.

Pay less interest on your overdraft

Once you've figured out how to rein in your spending, there are two easy ways to lower the amount of interest you pay on your overdraft - which will help you to obliterate your debt more quickly.

The first is to pay off your overdraft completely by transferring money into your account using the Virgin Money credit card. This card offers 0% interest on balance transfers for 16 months - so you won't pay a penny in interest on the amount you transfer until June 2010. There is a 4% fee for this transfer however.

The second option is to open the Premier current account with Alliance & Leicester. This account offers an interest-free overdraft for 12 months on balances up to £2,000 - and, as a bonus, gives you £100 cashback, just for opening the account. You need to be able to pay in £500 a month, however, to qualify for this account.

Read more: 10 ways to save money you've never heard before.

Save more with a lovemoney.com savings account.

Pay less with a cheaper overdraft facility by switching current account.

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