Starting A Budget
Old Debt Category

1 Corinthians 7:23

Of all the budget categories when starting a budget, this is the one category that you want to drive down to zero because this category represents the old undisciplined life style as a slave to debt. Under the new paradigm of spending less than you earn you will not be adding debt to this category.

Photo by Andres Rueda

What Is Old Debt?
The Old Debt category contains the outstanding balances of all your loans except for your mortgage and car loan. This category contains all of your credit card balances, student loans, furniture loans, your second mortgage and any other outstanding loan.

What Is The Impact?
You want to come up with a plan to get rid of all this debt as quickly as possible. Take a look at your payments every month. Take a look at how much interest you are paying every month. That interest is just free money you are giving to the banks. What if you were able to take apply that money to your mortgage every month? You can pay off all of your debt if you come up with a plan and stick to it. Your path to real financial freedom begins with starting a budget

How Do I Begin?
As a part of starting a debt reduction budget you will want to list all of your debt, including car loans and your mortgage. And, you will want to list them in a matrix from lowest outstanding balance to highest outstanding balance. See the spreadsheet below as an example:

LoanOutstanding BalanceInterest RateMonthly Payment
Credit Card 1$3,628.5419.99%$145.14
Credit Card 2$5,825.3919.99%$233.02
Credit Card 3$7,819.9723.99%$348.80
Student Loan$12,500.006.00%$241.66
Car Loan$17,438.004.50%$390.24

Create Margin
As you put your budget together, look at where you can reduce your spending every month so that you have some margin. How much margin can you generate? $100 per month? $50 per month? $20 per month? $10 per month? It matters more that you do have margin to put against your debt than how much you put against the debt; certainly more is better. In addition to reducing your spending look at ways to possibly increase your income. Are there things that you can sell? Whatever your margin ends up being, start paying down that principle on your lowest loan balance and pay your minimum to everything else.

Looks Like A Snowball
Because you are living on a balanced budget and only spending according to your plan, this category will not increase. Therefore, once you have paid off that first loan balance you can take what you were paying on that first loan and apply it to the second loan, continuing to pay your minimums to everything else. You have just increased your margin every month by that first loan payment! Once that is paid off you can take what you were paying on the first two loans and apply it to the third and so on. This is called the snowball effect. Just as a snowball rolling down hill gathers more snow and more momentum, you are able to apply more and more money to your dwindling debt as you roll money from one debt to the next.

There Is Hope!
In a short while you will see that you are completely out of debt. Everything began with your starting a budget and being diligent to living out your spending plan.

How To Make A Budget from Starting A Budget - Old Debt

Biblical Personal Budgeting Homepage from Starting A Budget - Old Debt