Questions About Basis Points, Churning, Scentsy, and More!

What’s inside? Here are the questions answered in today’s reader mailbag, boiled down to summaries of five or fewer words. Click on the number to jump straight down to the question.
1. Will or trust?
2. Basis points?
3. Safe withdrawal rate
4. Replacing work with more work
5. Churning
6. Lacking motivation
7. Term policies waste of money?
8. Want to be single?
9. Staying in shape while telecommuting
10. Do programmable thermostats save money?
11. Minimal food budget for family?
12. Scentsy refills?

This past weekend, my family visited a community festival not too far from our home. We had a great time as always enjoying the usual parts of a Midwestern community festival – there are usually a ton of activities related to the town’s history and heritage, a free parade, and usually lots of free things to see.

It can be expensive, too, especially with kids. “Fair food” is usually overpriced and every single festival tries to mine money for future festivals from the parents by having rides or inflatables for the kids. The money usually funds the “free” things next year.

Usually, we just bring some of our own food and water, but we’ll often buy some rides for the kids. For me, though, the best reason to go is the performance by local bands, many of which are talented enough that they could make a career out of their music if they so chose. They’re usually completely free and performed on a community stage.

On with the questions!

Q1: Will or trust?

My husband and I just had a baby and we can’t figure out what’s better for our situation, a will or a trust. We aren’t rich, but we own our home and started a college find for him as soon as we decided to get pregnant.
– Amy

I’m assuming by “trust” that you’re referring to a “revocable living trust,” which is a mechanism that some people use to pass their estates along to their descendants instead of or in addition to a will.

For your purposes, a will is probably the document you want. A trust requires you to transfer control of your property to that trust, which is a step that does make handing the property to children easier in some cases, but generally ends up meaning more paperwork over the years. The benefits of it usually aren’t worth the time, paperwork, and legal fees involved for small estates, especially for people just starting out.

A will allows you to name guardians for your child should you pass away early and will also allow you to put all of your assets into a trust for your child should you pass away early. It’s a pretty simple document that a lawyer can help you set up quickly or you can set up on your own.

Q2: Basis points?

What is a basis point? The Google definition seems way too simple to need an extra term for it (0.01%? Really?) I hate reading about financial stuff because they use complicated words for stuff that’s like common sense once you know what it means.
– Adam

As you correctly stated, “basis point” is simply 1/100th of one percent. In other words, it’s a percent of a percent. 100 basis points equal 1 percent. That’s really all there is to it.

Now, why do they use an extra term like “basis point” to describe something so straightforward? 1/100th of 1% is a bit more wordy than basis point, and it’s a term that’s commonly used in finance when you’re dealing with huge numbers. A basis point in a $1 billion deal is still $100,000. It makes sense to have a term for this.

In most ordinary personal finance, this term shouldn’t come up too often except to describe the expense ratio on a mutual fund, which is sometimes described in basis points. That’s mostly done because many of the people that actually dig into that level of detail are institutional investors who are managing a lot of money.

Q3: Safe withdrawal rate

Wanted to drop a tip that makes me feel really good. I like to add up the value of all of my retirement and other investing accounts and calculate my monthly “safe withdrawal rate.” Basically, I just multiply the total of all of those accounts by 0.04 (to get the 4% withdrawal rate) and then divide that by 12 to see how much I could withdraw from that account. For example, if I have $100,000 total, my safe withdrawal rate would be $333 a month. Feels good to see that number right now but when that number gets high enough to support me, I’m going to feel great.
– Andrew

I really like that way of looking at your retirement (or early retirement) savings. I also completely agree with you that, when that number starts getting big enough to look like a total you could survive on, it feels really good.

It’s also a fun number to chart over time, just like your overall net worth. As it gets bigger and bigger, it not only represents you getting closer and closer to retirement, but it also represents a larger and larger “emergency fund,” meaning you could survive some pretty major changes in your life without skipping a beat.

For example, if your investments give you $1,000 a month in investment income, you could easily handle it if you moved to a lower paying job. Perhaps it’s one that pays $1,000 less per month (for a job you really love), in which case you could be breaking even if you start tapping that $1,000 a month from your investments.

Q4: Replacing work with more work

I’ve been reading a lot online about people who retire early in their thirties with just enough money to survive on and it often seems to me like they’re just trading one job for another. If you quit your job just to spend all of your time around home doing things to save money, aren’t you just basically trading jobs?
– Nick

I think that “lean” early retirement, which is what you’re describing, comes down to personal values more than anything else. The people that engage in it get a lot of value out of things like repairing their own bicycle and preserving their own food. Such manual tasks can bring a lot of positive spiritual rewards.

If you’d like to dig more into this idea, I’d suggest reading things like Self-Reliance by Ralph Waldo Emerson or Shop Class as Soulcraft by Matthew Crawford or Voluntary Simplicity by Duane Elgin (all of these links go to my own discussions of these works).

Beyond that, many people simply find the freedom to make such a choice to be highly exciting. It’s an option that’s now on the table for them and, because of that, their personal freedom is significantly expanded.

For others, such activities might not seem all that enjoyable. It does seem pretty pleasant to me, though. I often daydream about simply getting up from my desk and heading outside to fix a lawnmower or something like that.

Q5: Churning

Are you familiar with “churning”? Does it work? It seems to be kind of a hobby where you get lots of rewards credit cards and get the signup bonuses from each of them and then eventually cancel them and transfer balances around in order to never pay any interest and get lots of sign-up rewards. Seems like a fair amount of work for relatively small benefit to me but some people I know swear by it!
– Debbie

Churning is pretty much exactly as you describe it. It’s the practice of signing up for credit cards with big signup bonuses, doing what you need to do to get the bonus and keep the bonus, and then cancelling the card.

The benefit is obvious: you can get a lot of very nice signup bonus rewards – usually big bundles of frequent flyer miles or hotel points or other rewards.

There are some drawbacks, though. It takes time. You have to pay attention to the details of offers. It’s going to ding your credit somewhat as you’re opening new lines of credit quite regularly, though this shouldn’t be a real problem if your credit is otherwise good. You have to stay on top of a lot of different credit card bills and also pay attention to new offers coming down the pipe. If you mess up, you can sometimes end up getting hit with enough interest payments to devour the value of the rewards you get.

I usually view churning as a hobby rather than as a real personal finance strategy. It’s a way to spend some spare time earning airline miles or hotel nights if you’re willing to invest time and effort in it.

Q6: Lacking motivation

I’ve been reading your blog for the last few months and I love your story of financial turnaround and working toward retiring early. Great stuff to read!

I have tried many times to get on this road myself but I just can’t keep the ball rolling. I basically feel completely unmotivated to continue after a while and kind of grow to hate the whole idea. Then a few months later I’ll cycle back to loving the idea and jump on it whole hog again.

Thoughts as to how to continually motivate myself?
– Daniel

For me, the best tool for keeping the motivation rolling was to just automate my savings. This forced me to learn how to live my day-to-day life with less money in my checking account and it kept the ball rolling toward financial independence even when I wasn’t too motivated to do it.

Once you have that automated system set up, you can’t just stop saving because you’re unmotivated for a while. You actually have to take negative action to undo it. You have to go in and turn off the automatic savings. That’s actually a threshold that’s much harder to cross than deciding simply to not contribute any more this week or next week.

What I actually found is that by automating it, it took the process out of my regular thoughts most of the time. I don’t even really think about it. It just happens – the money goes out of my checking and into investments. When I’m not feeling hugely motivated, I just don’t think about it or check it at all. When my motivation naturally rises, I check it and I’m so glad that the ball kept rolling while my heart and mind were elsewhere.

Q7: Term policies waste of money?

My insurance agent says 97% of term policies never pay out and you’re just throwing your money away buying one. True?
– Nate

It’s true that some high number of term policies never pay out. 97% is believable. However, that doesn’t mean they’re a waste of money – they’re actually a bargain.

The reason you’re buying insurance is for that 3%. You don’t want term life insurance to pay out because that means the person you insured has passed away. Unless you want someone dead – and I seriously hope that you do not – having the policy pay out is a highly undesirable outcome.

Term life insurance is the cheapest way out there to protect that 3% situation. It’s there in case the insured person dies. If the insured person doesn’t die, that’s great; that person lives! If that person does die, then there will be plenty of money from the term policy to replace their income.

Other policies try to tack on a pretty awful investment package to this term life policy. Avoid all of it. It’s virtually always laden with expensive commissions and high fees and expense ratios. Buy the cheapest term policy you can from a reputable insurance house (shop around a little) and get your investments elsewhere by shopping around for them separately.

Q8: Want to be single?

Sometimes you write posts about doing things that just don’t make any sense at all with a family. Do you want to be single again?
– Anthony

Not in the least. However, I do respect that there are many aspects of minimization that are simply easier to do if you’re single. It is far easier to live out of a backpack and couch surf if you don’t have three young children, for example. It is far easier to live in a tiny efficiency apartment if you’re single.

I don’t write The Simple Dollar for myself. I write it for a lot of people, some of whom are single, many of whom who are looking for alternative ways to seek financial success or find a new direction in their life. If I didn’t present interesting ideas that I think up or learn about, even if they don’t directly apply to me, I wouldn’t be doing a very good job.

Would I move to a much smaller place if I were single? Absolutely. Do I sometimes think about how I would do things if I were single? Absolutely; I can learn from those thought experiments. Does that mean I want to abandon my family in any way? Absolutely not. There’s nothing in the world that I would trade my wife or my kids for.

Q9: Staying in shape while telecommuting

As a work from home / telecommuter what do you do to stay in shape? I have to actually make a special trip to go to the gym instead of just stopping on my way home so my exercise routine has fallen apart since starting telecommuting. Thoughts?
– Sandy

Well, what kind of exercise do you really enjoy? Do you like running? Go outside your front door and run! Do you like lifting weights? Buy a few weights and figure out a reasonable routine at home!

Personally, I like having an exercise routine. I kind of jump around – in the past I’ve done both DDP Yoga (which I return to whenever my back hurts because it is WONDROUS for lower back pain) and P90, but I mostly stick with the Lifetime Fitness Ladder, which I try to do twice a day. I also really enjoy long walks to clear my head when I’m trying to think through a problem or how to write about a particular topic.

It really depends on what you want to do. However, more than anything else, I’d encourage you to start scheduling exercise time, either at the start of your day or right in the middle of your workday or at the end of the workday. Make it a completely normal part of your routine.

Q10: Do programmable thermostats save money?

I’ve been thinking about buying a programmable thermostat because of all of the positives I’ve read online about them but then I talked to my friend and he says it hasn’t saved him any money. Is a good programmable thermostat worth it?
– Adam

I don’t think you need a high-end programmable thermostat to enjoy the benefits. Even an entry-level one does the job you need.

The real benefit in a programmable thermostat comes from raising the temperature in your home when you’re not there during the summer and lowering the temperature when you’re not there in the winter and doing it automatically. If you do this normally when you leave the house, a programmable thermostat isn’t going to save you money.

For me, I don’t mind the house being warmer in the summer and cooler in the winter than the rest of my family, so I have a weekday schedule built in that basically turns off heating and cooling for most of the day in our house. It kicks on automatically in the mid-afternoon to get the house to a nice temperature for the family evening hours and then kicks back off overnight, turning back on in the early morning for everyone’s morning routine.

It saves money by doing this automatically without me having to remember to do it each morning and evening. I don’t have to remember to move it at all – it just happens. It’s the adjustments that actually do the money saving, not the thermostat; the thermostat just makes sure that I actually do the adjustments.

So, do you naturally do those kinds of adjustments? If you forget quite often, a programmable thermostat will probably save you some real cash.

Q11: Minimal food budget for family?

What is the minimal food budget for a family of four?
– Randu

The USDA “thrifty” family cost of food estimation for a family of four is $558 per month with young children and $639.60 if you have older children. We have a family of five (two adults, two “older” children by the USDA standards, and one “younger” child) and my monthly food cost estimate for us is about $800, though I know we could cut it further than that with ease if we needed to.

I know that with some careful home economics, a family can definitely get below that “thrifty” number from the USDA. The more you cook at home – and the more you prepare meals from scratch using low cost ingredients like dried beans and dried rice – the lower you can make that number go. If you supplement that with a well-tended garden that can provide vegetables for you and you save the excess for future months via preservation (canning, drying, etc.), you can cut it even more. These things really depend on having someone at home who will do all of that work, though.

Many two-income American families end up relying at least somewhat on convenience-based shortcuts at least some of the time – things like prepackaged foods, takeout foods, delivery, and dining out – so that increases the cost simply out of necessity. Thus, I think the numbers from the USDA are reasonable in a two-income household that pays attention to the dollars and cents.

Q12: Scentsy refills?

Do you have any suggestions for cheap ways to refill Scentsy? Love my house smelling good but don’t want to pay the high price.
– Nina

I’d just suggest doing what we do to keep our house smelling good: we regularly air out our house by opening the windows, we use baking soda to absorb bad odors, and we regularly cook things that smell good or leave out aromatic parts of our meals.

For example, whenever I smell something bad or an aroma I just don’t want, the first thing I do is open the windows if it’s at all possible with the current weather. I also put a bit of baking soda into a saucer and sit it somewhere near where the bad aroma is.

To add a good smell, I’ll just cook something that smells good. I’ll cook apples in the fall and use a lot of nutmeg and cinnamon in it, then use the apples for a pie or a cobbler. I’ll make an aromatic tea. I’ll make something with oranges or grapefruits in it – or just eat an orange or a grapefruit – and leave the peels out in a few places around the house (picking them up in a day or two). Those things naturally make the whole house smell great.

Got any questions? The best way to ask is to follow me on Facebook and ask questions directly there. I’ll attempt to answer them in a future mailbag (which, by way of full disclosure, may also get re-posted on other websites that pick up my blog). However, I do receive many, many questions per week, so I may not necessarily be able to answer yours.

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