Guest post by Craig Hansen
The fine folks at United First Financial (UFF) have come out with a new version of their Money Merge Account (MMA). It’s version 4, and it’s marketed as something that uses… factorial math! And promoters are saying the software does over 3 million calculations each time you use it to analyze a purchase.
Consumers are being tricked into thinking UFF has a magic bullet, and are plunking down $3,500 for the “chance” to use the software!
“Factorial math” is really just a useless bit of new marketing-speak. Factorials are the basis of combinatorial (finite) math. If you took finite math in school, you would start with factorials. They are expressed as “n!”, where ‘n’ is any non-negative integer.Some factorials:
1! = 1
2! = 2×1 = 2
3! = 3×2×1 = 6
5! = 5×4×3×2×1 =120
And, just for a loop:
0! = 1
By now, you get the picture. Factorials are just the product of all the integers less than or equal to ‘n’. They come in handy when computing permutations and combinations.
Why the mini math lesson? Promoters of MMA say “Someone with a mortgage and only 10 debts will have 3.6 million ways to pay off that debt. No, you can no longer do this on your own.”
In your example, a person has 10 debts. For some reason, you want to know how many different ways he could approach retiring all debts, in order. It’s a simple permutation:
nPr = 10P10 = 10! / (10-10)! = 10! / 0! = 3628800 / 1 = 3628800
Look familiar? 3.6 million different ways to pay those 10 debts.
But reality is so much simpler!
For example, I’m about to head to lunch. It’s just down the street. I could just walk one block north, but I could also walk one block south, then two blocks north. I could walk past the diner and turn around. I could walk down multiple streets and eventually end up at the restaurant. I have infinite paths available to me, but the most obvious one is staring me in the face. Just like the most obvious way to pay down a debt is to curtail spending and send all extra money available to service the debt.
If the question is simply in what order to attack the debts, then retire the higher interest small debts first. But the problem is even more simple than that, because someone with 10 debts should probably consolidate a number of (probably high interest credit card) debts into a lower interest loan. Maybe even a HELOC, so long as you don’t let the MMA software anywhere near it.
That “3.6 million ways” claim is one more example of a UFF agent (and now an agent group calling themselves The Jubilee Project) using math to confuse potential clients and make mortgages seem like rocket science.
The math behind a mortgage is not particularly hard. Paying down a mortgage as quick as your finances will allow is exceptionally easy. I’m 36 and debt-free with a nice house and 2 nice cars. Have been for a year. I paid off my mortgage by sending any extra money directly to the principal. There is no easier way, no faster way, and no cheaper way to do it.
But that was obvious to me, my Chartered Accountant (and mother-in-law), and everyone I knew back when I bought my house.Given the same money to work with, the MMA will pay down your mortgage slower than simple prepayments. That analysis has been done to death, and UFF agents won’t accept or have failed in the challenge to prove otherwise, so let’s move on to the “habit-changing” aspect of the MMA.
Compare these two statements:
“At the end of the month, I pay my bills, and everything over $X in my bank account is applied to the mortgage principal.”
“At the end of the month, I pay my bills, and log into the UFF software to enter my new financial information. The UFF software tells me if I should make a transfer from my HELOC this month, and how much. I then go back to my bank and make any requested transfer.”
The MMA is twice as much work as simple prepayments. If it is good habit-forming, it’s not because it is easier.
So, let’s look at bad habits. Assume the homeowner is a shopaholic. One of the first actions in setting up the MMA is to get a secured line of credit for tens of thousands of dollars. Now we’ve given someone with poor impulse control easy access to a new entertainment system, a vacation, a complete set of 1967 baseball cards, new golf clubs, etc. The MMA has created a “kid in a candy store” problem.
The MMA is just a bad deal on multiple levels. In addition to the reasons above, it exposes the homeowner to fluctuating HELOC rates and the potential of having their HELOC frozen by the bank. It’s ridiculously expensive and handcuffs the client with more debt. From published examples, the MMA is not even close to efficient with the HELOC transfers it recommends.
Mathematically, the banks have all the angles covered. The typically higher interest rates on HELOCs almost negates the timing advantages of the HELOC shuffle. If someone comes along with a product that actually accelerates a mortgage better than one can easily do on their own, I’d be all for it. The MMA isn’t that product.
Debating this issue with UFF agents typically goes nowhere. They duck their heads in the sand whenever math is brought up. Finance IS math. I’ve demonstrated quite clearly that the “factorial math” claim by The Jubilee Project is a smokescreen.
Their reply was to dismiss me, and say, “I sure don’t claim to do the math”.This is who you believe in this discussion? The group that wants to sell you a $3500 debt-reduction strategy, but doesn’t do math?They’ll have no problem doing the math to divide the commission from the sale, I promise you that.
Further, one doesn’t have to jump off a bridge to know it will kill you. This is simple math. The MMA approach will cost a homeowner money versus what they can do themselves, much easier, for free.
The MMA will pay off the mortgage, but will do so more slowly and with more work and more risk than simply applying extra money to the principle yourself. So it will work, but not well. I’m sure many people believe it is working for them. It’s just not working as well as it should, and the cost is insane.