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I recently saw a social media ad from Robert Herjavec from Shark Tank that shared the Debt Backpack method, but I was immediately confused.
I have been in the personal finance space for 10 years, and our debt calculators have helped over 500,000 people understand how to get out of debt more easily.
I have never heard of the debt backpack method, so one of my first thoughts was, “Is this a scam?” In this article, we are going to cover:
So, what is the debt backpack method?
The“Debt Backpack Method” is a debt payoff strategy that compares debt to adding rocks to a heavy backpack. Every debt you acquire adds weight to the backpack, slows down your financial freedom, and makes it harder for you even to continue.
Here's my recent video summarizing the method.
The goal of the debt backpack method is to reduce the total amount owed, and not allow you to continue accruing interest, which is like to continuing to add rocks to your backpack, making your debt load impossible to manage.
This sounds great, but I just spoke to someone recently who started the debt backpack method, but the issue was that they got pitched that they would save a lot of money, but then they didn’t realize a crucial component that made the Debt Backpack method ultimately fail for them.
Let’s discuss saving money and then consider the drawbacks.
In this strategy, a company or you is negotiating the balances of your accounts at a lower amount than what is owed. So, if the balance is $10,000, the company or you would negotiate the balance for $5,000.
This can help you get out of debt much faster than the minimum payment trap, which can take years and years to see any progress.
That said, you’ve heard the saying, “If something is too good to be true… it probably is”.
And that’s a 100% fair point, so let’s talk about the cons, as there are definitely cons to this method.
Firstly, you need to know that for the banks to agree to taking a lower balance, you need to have leverage.
The natural next question is, “How do you get leverage in order to negotiate a lower balance?”
That’s where the cons come in.
You generally have to let your accounts “go behind” on payments if they are not already, so that your bank or creditor is interested in negotiating with you on a lower balance.
Now, this is where the cons come in. I want to address 3 cons that may be obvious to you, but I’d like to share them anyway.
So, now you’re wondering, “Is the debt backpack method a scam? And based on the above, the answer may surprise you, so let’s cover that next.
No, the debt backpack method is not a scam, but I personally believe that it’s only suitable for a specific audience.
Now, who’s that?
I would argue that the debt backpack method may be the best option if you have already fallen behind on your debt. I use the word may as there are other hardship methods, such as credit counseling and bankruptcy, that may be better for you as well, which is one of the reasons my company, Ascend Finance, built free debt calculators to help people compare options holistically .
So, if you see that you will fall behind and perhaps you have tried to get debt consolidation loans and have failed, then the debt backpack method may be best, but that’s a big if, so what are the other debt payoff strategies you can consider, and what’s my favorite strategy?
So, let’s cover the most important question next, which is, which debt payoff strategy should you choose?
The two most popular debt payoff strategies are the snowball and avalanche method, and neither of these are my favorite, but I’ll share my favorite next.
You may be familiar with these strategies, so I will spend only a couple of minutes sharing hwo they work and a quick example. Please feel free to skip forward to the next section if this is redundant.
Also, you only use a debt payoff strategy when you can pay extra
The snowball debt payoff strategy is the most popular per Google’s search trends, and that may be because Dave Ramsey is a huge supporter of it in his Baby Step method.
In the debt snowball method, you line up your debts from the lowest owed to the highest owed, and you put your extra payment towards the lower amount, and then once that is paid off, you use the amount you were paying for the lowest debt and apply that amount + the amount you were paying to the next lowest debt.
In simple terms, if you have a minimum payment of $100 on debts of $5000 and $25000 and can afford to put $100 extra per month, you would put $200 towards your $5000 debt and $100 towards your $25,000 debt.
The debt avalanche method involves lining up your debts by interest rate and allocating the extra amount each month to the one with the highest interest rate.
Theoretically, you will always save the most money using this method, but you may not get the psychological joy of paying off debts.
Using the same example as above, if you have a minimum payment of $100 on debts $5000 with 2% interest rate and $25000 with 50% interest rate and can afford to put $100 extra per month, you would put $200 towards your $25,000 debt and $100 towards you $5,000 debt.
I have run so many scenarios before where you can lose thousands using the snowball method.
That said, let’s talk about my favorite debt payoff strategy next.
I always loved the psychological benefit of snowball because you get to see your number of accounts go down, but I hated that you could lose thousands of interest with Avalanche.
So, I used fancy schmancy technology to create the Savvy method that tries to combine the best of both worlds: Interest Savings + Psychological benefit
The Savvy method tries to be savvy to help determine which debts to prioritize based on a combination of the snowball and avalanche methods. If you have smaller debts and larger debts, Savvy may prioritize the smaller balances first. If your large debts have insanely high interest rates, Savvy may prioritize the highest interest rates.
It’s a custom solution and personalized to you, using your unique data.
To utilize this method, we built the free Savvy debt payoff planner, which is an online program and an iOS app that has both a budget that can help you determine how much extra you have to put towards your debt and a debt payoff planner that can help you prioritize which to put that extra towards.
Although the Savvy method is my favorite debt payoff strategy, it may not be the right fit for you. The Savvy is a combination of the 2 methods as it tries to be a well-balanced strategy.
That said, if you are determined to get out of debt and nothing can stop you, then the avalanche method may be the best option, as it saves you the most interest.
If you need to have the psychological benefit of seeing the number of debts go down faster, then the snowball method may be right for you.
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