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Money Smarts Quiz—What’s Your Money IQ?

Take this financial literacy quiz and review your money knowledge.

1. True or false:

Learning financial literacy from an early age generally leads to both earning and saving more as an adult.

2. When it comes to your credit score, this factor matters most:

A. How much credit for which you qualify
B. A diverse mix of credit accounts and limits
C. Making debt payments on time

3. True or false:

87% of high schools nationwide require a course in personal finance.

4. Which of the following is an example of a budgeting method?

A. The 50-30-20 method
B. The circle method
C. The snowball effect

Section one completed! Keep going.

5. Which bank account is likely to pay the highest interest rate on money saved?

A. Savings account
B. Six-month share certificate
C. Three-year share certificate

6. Savings accounts and money market accounts are most appropriate for:

A. Long-term investments, such as retirement
B. Emergency funds and short-term goals
C. Earning a high rate of return

7. If your assets increase by $5,000 and liabilities decrease by $3,000, your net worth:

A. Increases by $2,000
B. Increases by $8,000
C. Increases by $3,000

8. Net worth is equal to:

A. Total assets
B. Total assets plus liabilities
C. Total assets minus liabilities

Section two done. Not too bad, right?

9. If you always pay the full balance on a credit card, which of these is least important?

A. Annual interest rate
B. Annual fees
C. Line of credit

10. To reduce total finance costs paid over the life of an auto loan, choose a loan with the:

A. Lowest monthly payment
B. Longest repayment term
C. Shortest repayment term

11. On which type of loan is interest never tax deductible?

A. A home equity loan
B. An adjustable-rate mortgage
C. A personal vehicle loan

You’re more than halfway done.

12. A young investor willing to take moderate risk for above-average growth is likely most interested in:

A. Treasury bills
B. Money market mutual funds
C. Balanced stock funds

13. The benefit of owning diversified investments is:

A. Reduced risk
B. Increased return
C. Reduced tax liability

14. The main advantage of a 401(k) plan is that it:

A. Provides a high rate of return with little risk
B. Shelters retirement savings from taxation
C. Provides a well-diversified mix of investment assets

15. To ensure some of your retirement savings will not be taxable income upon withdrawal, contribute to:

A. A traditional individual retirement account (IRA)
B. A Roth IRA
C. A 401(k) plan

Home stretch. You’ve got this!

16. An insurance policy with a higher deductible creates _______ premiums.

A. Higher
B. Lower
C. The same

17. Single workers without children benefit most from ________ insurance.

A. Life
B. Disability
C. Dental

18. Which policy provides the most coverage at the lowest cost for a young family?

A. Renewable term life
B. Whole life
C. Universal life

19. Which household typically has the greatest life insurance needs?

A. A middle-class retired couple
B. A middle-aged working couple with children in college
C. A single-earner family with two young children in preschool

Answers:

1. True.
Teaching young people about money at an early age will impart them with crucial knowledge and skills to assists and enable them to make informed financial decision. Someone who doesn’t have an idea on how to manage their finances can easily fall into various financial traps unknowingly. It is generally difficult to fix bad decisions concerning finances—it can take several years to do so.

2. C. Most important: Debt payment history.
Your debt payment history is one of the most important credit scoring factors and can have the biggest impact on your scores. Having a long history of on-time payments is best for your credit scores, while missing a payment could hurt them.

3. False.
Currently, 21 states require high school students to take a course in personal finance: 6 states require a standalone course, and 15 states integrate required coursework into another course.

4. A. The 50/30/20 budgeting rule.
The rule states to spend up to 50% of your after-tax income on needs and obligations. The remaining half is split between 20% savings and debt repayment and 30% to everything else that you might want. The rule is a template that is intended to help individuals manage their money and save for emergencies and retirement.

5. C. Three-year share certificate.
Share certificates require a fixed holding period to avoid withdrawal penalties; savings accounts do not. To provide an incentive for investors to constrain assets, as well as the upward-sloping yield curve, a higher interest rate is typically associated with a longer holding period.

6. B. Emergency funds and short-term goals.
Savings accounts and money market accounts are very liquid (i.e., can provide cash with little or no penalty), so these accounts are most appropriate for holding funds for emergencies or goals in the short run. Less liquid accounts with higher expected yields are more appropriate for long-run savings goals.

7. B. Increase by $8,000.
$5,000 – (-$3,000) = $5,000 + $3,000 = $8,000. This household’s net worth increases by $8,000; a household can increase net worth either by increasing its assets (e.g., $5,000) or decreasing its debt (e.g., $3,000).

8. C. Total assets minus liabilities.
A household’s net worth is calculated by adding up all the financial and non-financial assets and subtracting all debts owed.

9. A. Annual interest rate.
If you use your credit card for convenience only (i.e., pay off the bill when it comes), then the annual rate of interest, the rate at which you would borrow funds, is not relevant.

10. C. Shortest repayment term.
The amount of finance costs paid is dependent on term and interest rate—lower interest rates and shorter terms will lower the total finance costs.

11. C. A personal vehicle loan.
Interest on either a home equity loan or a mortgage can be tax deductible when you itemize on your income taxes; interest on a personal vehicle loan is never eligible for a tax deduction.

12. C. Balanced stock funds.
Compared to Treasury bills and money market mutual funds, stocks carry both increased risk and opportunity for gains. Younger investors, with longer investment time horizons, are good candidates for investing in an equity product, such as balanced stock funds.

13. A. Reduced risk.
Portfolio theory is based on the concept that combining noncorrelated assets (diversification) allows an investor to reduce risk without compromising expected return.

14. B. Allows you to shelter retirement savings from taxation.
A 401(k) plan is not an investment type, but rather a vehicle for holding assets that allows an investor to defer taxes.

15. B. A Roth IRA.
Traditional IRAs and 401(k) plans allow individuals to contribute pretax dollars to investments and defer paying taxes. With Roth IRAs, individuals contribute after-tax dollars and pay no taxes upon distribution.

16. B. Lower.
Individuals can reduce premium payments (the cost of buying insurance) if they are willing to retain a greater proportion of the risk—i.e., paying a higher amount (deductible) when making insurance claims.

17. B. Disability insurance.
The primary purpose of life insurance for most workers is to protect dependents who rely on the income of others, while a disabled worker with no dependents would rely on disability to replace income. Dental insurance is a less acute need than disability for a single worker.

18. A. Renewable term life.
Both whole and universal life insurance products include a cash value component used to pay for future insurance coverage, and therefore provide less coverage today for each dollar of premium paid.

19. C. A single-earner family with two young children in preschool.
The primary purpose of life insurance is to replace income relied on by dependents. The single-earner family with dependents (children and perhaps a nonworking spouse) would have the greatest financial need if the primary earner died.

So, how did you do?
Life should be enjoyed. Financial knowledge and having a savings plan to commit to allows you to cover your expenses, save for retirement, and still participate in the activities you relish.

Now that you’re up-to-speed on a basic understanding of healthy finances, learn how much money you can save with Tower services.

Resources: The Penny Hoarder, AARP The Magazine, Investopedia, Yahoo Finance