Senior Honors Projects, 2010-current

Creative Commons License

Creative Commons License
This work is licensed under a Creative Commons Attribution-Noncommercial-No Derivative Works 4.0 License.

Date of Award

Fall 2018

Document Type

Thesis

Degree Name

Bachelor of Science (BS)

Department

Department of Economics

Advisor(s)

William Wood

Joanne Doyle

Philip Heap

Abstract

Traditional mathematical analysis states that the most efficient way to pay off interest-bearing consumer debt is to pay the individual debts in order from largest to smallest interest rate. In doing this, the debtor will eliminate the largest sources of interest first, thus shortening the overall time-to-pay. This method is known as the “Debt Avalanche.” The “Debt Snowball” method, popularized in large part by investor-author David Ramsey, recommends that consumers pay debts in order from smallest to largest, regardless of interest rate. In this paper, I conduct an empirical analysis of the Federal Reserve’s Survey of Consumer Finance (SCF), calculating time-to-pay for several thousand households’ worth of financial data using a simplified mathematical model of snowball and avalanche models. This paper concludes that though the avalanche is more effective in the majority of cases, the snowball method is a very close competitor that offers debtors additional psychological benefits in motivation and habit-forming.

mcalliem_title_page.pdf (6 kB)
Title page for project

mcalliem_MATLAB.m (12 kB)
MATLAB code used in analysis

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