Challenge Overview
Build a sophisticated Excel model that analyzes multiple debt obligations and determines the optimal payment strategy to minimize total interest paid while achieving debt freedom in the shortest time possible. The model will compare different debt payoff strategies and provide actionable recommendations.
Financial Impact
This model addresses a critical financial challenge - the average American carries over $6,000 in credit card debt. Your optimization model could save thousands of dollars in interest payments and years of debt servicing.
Learning Objectives
Required Model Components
1Debt Portfolio Input System
Comprehensive Debt Input Framework:
Debt Portfolio Table Setup
Excel Table Structure: Create a structured table with the following columns for each debt:
Data Validation Setup:
• Debt Type: Create dropdown list (Credit Card, Student Loan, Auto Loan, Personal Loan, Mortgage, HELOC)
• Interest Rate: Validate range 0% to 35% with 2 decimal places
• Balance: Currency format with validation for positive numbers only
• Minimum Payment: Must be greater than interest-only payment
• Due Date: Day of month (1-31) with conditional formatting for payment scheduling
Additional Calculated Columns:
• Monthly Interest Rate (APR ÷ 12)
• Interest-Only Payment (Balance × Monthly Rate)
• Principal Payment (Min Payment - Interest Payment)
• Payoff Time at Minimum Payment (using NPER function)
• Total Interest if paying minimums only
Budget and Resource Planning
Monthly Budget Analysis: Create a comprehensive budget section to determine available funds for debt repayment.
Income Section:
• Net monthly income (after taxes and deductions)
• Side income or irregular income (averaged monthly)
• Total available monthly income
Essential Expenses:
• Housing (rent/mortgage, utilities, insurance)
• Transportation (car payment, insurance, gas, maintenance)
• Food and groceries
• Insurance (health, life, disability)
• Minimum debt payments (from debt table above)
Available for Extra Debt Payment: Calculate: Income - Essential Expenses - Emergency Fund Contribution
Windfall Planning: Set up inputs for:
• Tax refunds (annual amount ÷ 12 for monthly equivalent)
• Bonuses or irregular income
• Gifts or inheritance
• Side hustle income
Debt Categorization and Prioritization
Automatic Ranking System: Create formulas to automatically rank debts for different strategies.
Snowball Ranking: Use RANK function to order debts by balance (smallest to largest)
Avalanche Ranking: Use RANK function to order debts by interest rate (highest to lowest)
Hybrid Scoring: Create a weighted score combining balance and interest rate:
Special Considerations:
• Tax-deductible debt (student loans, mortgages) - adjust effective rate
• Promotional rates with expiration dates
• Secured vs. unsecured debt consequences
• Emotional/psychological factors (small wins vs. mathematical optimization)
2Payment Strategy Algorithms
Algorithm Implementation Guide:
Debt Snowball Implementation
Algorithm Logic: Focus extra payments on the debt with the smallest balance while paying minimums on all others.
Excel Implementation Steps:
1. Ranking: Use RANK function to order debts by balance (smallest = 1)
2. Payment Allocation: Create IF statement to allocate extra payment:
3. Balance Tracking: Calculate new balance after payment each month
4. Debt Elimination: When balance reaches $0, redirect payments to next smallest debt
5. Snowball Effect: As debts are eliminated, total available for next debt increases
Monthly Calculation Table: Create a table showing month-by-month progress:
Psychological Benefits: Track "quick wins" - number of debts eliminated and momentum building.
Debt Avalanche Implementation
Algorithm Logic: Focus extra payments on the debt with the highest interest rate for maximum mathematical efficiency.
Excel Implementation:
1. Interest Rate Ranking: Use RANK function to order by APR (highest = 1)
2. Payment Formula: Allocate extra payment to highest rate debt:
3. Interest Savings Calculation: Track total interest saved vs. minimum payments
4. Time Savings: Calculate months saved compared to minimum payment strategy
Advanced Features:
• Effective Rate Calculation: Adjust for tax-deductible interest (student loans)
• Rate Change Modeling: Account for promotional rates that will increase
• Compound Effect: Show how eliminating high-rate debt frees up more money faster
Comparison Metrics: Create dashboard showing:
• Total interest paid: Avalanche vs. Snowball vs. Minimum payments
• Time to debt freedom for each strategy
• Monthly cash flow improvement timeline
Hybrid Strategy Development
Balanced Approach: Combine psychological benefits of snowball with mathematical efficiency of avalanche.
Implementation Options:
Option 1 - Quick Win Start: Use snowball for first 1-2 small debts, then switch to avalanche
Option 2 - Weighted Scoring: Create composite score: (Interest Rate × 0.7) + (Psychological Factor × 0.3)
Option 3 - Threshold Method: Use snowball for debts under $1,000, avalanche for larger debts
Custom Weighting System: Allow user to adjust priorities:
Dynamic Rebalancing: Create logic to automatically adjust strategy based on:
• Changes in interest rates
• New debts added or paid off
• Changes in available payment amount
• Promotional rate expirations
Advanced Payment Scheduling
Bi-Weekly Payment Strategy: Implement bi-weekly payments to reduce interest and accelerate payoff.
Bi-Weekly Calculation:
• Convert monthly payment to bi-weekly: Monthly Payment ÷ 2
• Result: 26 payments per year instead of 12 (equivalent to 13 monthly payments)
• Calculate interest savings from reduced average daily balance
• Show time reduction for each debt
Payment Date Optimization: Align payment dates with income schedule:
• Map paycheck dates to debt due dates
• Calculate optimal payment timing to minimize interest accrual
• Account for grace periods and billing cycles
• Create payment calendar with automated reminders
Cash Flow Management: Ensure payment strategy doesn't create cash flow problems:
• Track monthly cash flow requirements
• Build in buffer for unexpected expenses
• Create contingency plans for income reduction
• Balance debt payoff with emergency fund building
3Advanced Optimization Features
- Payment Scheduling: Optimal timing (bi-weekly vs. monthly payments)
- Windfall Allocation: Optimize use of tax refunds, bonuses, unexpected money
- Refinancing Analysis: When consolidation or refinancing makes sense
- Balance Transfer Optimization: Credit card balance transfer scenarios
4Dynamic Modeling & Excel Advanced Features
- Solver Add-in: True optimization of payment allocation
- Data Tables: Comprehensive sensitivity analysis
- Goal Seek: Target date scenarios and payment calculations
- Dynamic Charts: Payment progress and interest savings visualization
Comprehensive Analysis Requirements
Total Interest Comparison
Side-by-side comparison of all strategies showing total interest paid, time to debt freedom, and monthly cash flow requirements for each approach.
Payoff Timeline Analysis
Month-by-month payment schedule showing when each debt will be eliminated under different strategies, with progress tracking and milestone identification.
What-If Scenario Modeling
Impact analysis of income changes, additional debts, interest rate changes, and varying payment amounts on the optimal strategy and timeline.
Psychological vs. Mathematical Trade-offs
Analysis of quick wins (psychological benefits) versus mathematical optimization, including recommendations for different personality types and financial situations.
Required Deliverables
1. Excel Optimization Model
Complete optimization tool with all strategies, scenarios, and advanced Excel features. Must include Solver optimization, Goal Seek functionality, and dynamic visualizations.
2. Strategy Comparison Report
Detailed analysis of different approaches with clear recommendations based on various financial situations and personal preferences. Include mathematical justification.
3. Implementation Plan
Step-by-step action plan for optimal debt elimination, including specific payment amounts, timing, and milestone checkpoints for tracking progress.
4. Sensitivity Analysis
Comprehensive analysis of how changes in income, interest rates, or payment amounts affect outcomes, with recommendations for different scenarios.
Office Hours Discussion
Required Demonstration
Schedule a meeting during office hours to demonstrate your optimization model, explain your methodology, and discuss the financial insights. Come prepared to show how the Solver add-in works and justify your recommendations.
Discussion Topics
- Solver optimization setup and constraints
- Strategy comparison results and insights
- Psychological vs. mathematical trade-offs
- Real-world application and limitations
Office Hours Schedule
- Tuesday 5:00 - 6:00 PM
- Thursday 1:00 - 2:00 PM
- Wednesday 4:30 - 5:30 PM (Zoom)
- By appointment
Assignment Summary
Life-Changing Potential: This model could save you thousands of dollars in interest and help you achieve financial freedom years earlier. The optimization techniques you'll learn apply to many other financial and business decisions!