April is Financial Literacy Month: How Money-Smart Are You?

I just got a financial literacy test from CredAbility, a nationwide credit counseling organization based out of Atlanta. (I’m on the advisory board of their West Palm Beach branch.) In honor of Financial Literacy Month, take a look and see how many of these questions you can answer. The correct answers are the end of the quiz.

Select the best answer to each of the questions.

1. Which of the following best defines your net worth?
A. How much money you have in your wallet
B. How much money you have minus how much money you owe
C. The total value of your assets minus your liabilities
D. How much money is left from your paycheck after you pay your monthly bills

2. What percentage of my income should I spend on my monthly mortgage payment?
A. Whatever the bank says you qualify for
B. No more than 25 percent of your gross pay or 35 percent of your take-home pay
C. No more than half of your paycheck
D. Whatever you are comfortable with

3. Social Security taxes have been reduced for 2011. How should you redirect this extra money?
A. Go out to dinner once a month
B. Use your extra income to buy lottery tickets
C. Build an emergency fund or pay down credit card debt
D. Stash the money in a mattress for a rainy day

4. You owe $5,000 on a credit card that has an interest rate of 18 percent and a minimum payment of 2 percent of the balance. If you don’t purchase another thing and make only minimum payments, how long will it take you to pay off the balance?
A. 8 years, 6 months
B. 17 years, 9 months
C. 25 years, 7 months
D. 39 years, 4 months

5. You recently lost your job. Which expenses should you eliminate immediately?
A. Mortgage/rent
B. Medical insurance premiums
C. Monthly credit card payments
D. Dining at restaurants

6. If you save $100 a month from ages 25-40 or save $250 a month from ages 40-60, and both accounts pay interest of 7 percent, which will have a larger balance when you are 60?
A. Saving $100 a month from age 25-40
B. Saving $250 a month from 40-60
C. Both accounts will have about the same balance

7. You checked your free credit report at www.annualcreditreport.com and have found an error. How do you correct it?
A. You don’t need to – if it’s wrong, it’s no big deal
B. Just let creditors know if you apply for new credit
C. Contact the credit bureaus directly
D. File a small claims lawsuit against the company

8. You purchase a $20,000 car with 10 percent down and take out a loan with a 10 percent interest rate for 60 months. About how much will your monthly payments be?
A. $257
B. $382
C. $469
D. $512

9. Under IRS guidelines, what is the maximum you can contribute to your 401(k) in 2011?
A. Up to 20 percent of your salary
B. Up to $1,000 a month
C. Up to $16,500
D. As much as you want

10. If a person 62 or older obtains a reverse mortgage, he or she is still responsible to pay property taxes and insurance.
True
False

11. How long can negative information stay on your credit report?
A. Negative information is not included on your report
B. 3 years
C. 7 years
D. Forever

12. If a thief takes your credit card and uses it, how much could you be responsible to pay?
A. Nothing, if you report the card stolen before any charges are made
B. Up to $50 if charges are made before you report the loss
C. All charges made before you report the card stolen
D. Both A and B

13. If you take out a $150,000 mortgage for 30 years at 5 percent, your payment will be about $805 per month. If you pay $100 extra each month, how many years/months faster will you pay off your mortgage?
A. 2 years, 6 months
B. 4 years
C. 6 years, 5 months
D. 8 years, 2 months

14. How much should you have in an emergency savings account?
A. $500-$1000
B. 3 months of living expenses
C. 6 months of living expenses
D. An emergency savings account? Isn’t that what credit cards are for?

15. A 15-year mortgage typically requires higher monthly payments than a 30-year mortgage, but you will pay less interest over the life of the loan.
True
False

Answers:

  1. (C) – Your net worth is the total value of your assets (including the market value of your home) minus your liabilities (including what you owe on your mortgage).
  2. (B) – Home prices have come down significantly, and it may be the right time to buy, but be realistic when it comes to figuring out how much you can spend. Be sure that your payment, including principal, interest, taxes, and insurance do not exceed 25 percent of your gross income or 35 percent of your take-home pay.
  3. (C) – While it may be tempting to take the mattress approach, an emergency fund can help you be prepared for the unexpected, and paying off credit card debt will provide long-term financial benefit.
  4. (D) – Making just the minimum payment, it will take 472 months, or 39 years and 4 months before paying off the balance. And during that time, you will pay $13,396 in interest, essentially paying 3 times for everything you bought.
  5. (D) –Dining out is the first expense to go. It is very important to stay current on your rent or mortgage payment as well as any insurance premiums for your mortgage, automobile, health, and life.
  6. (A) – Saving just $100 a month from age 25-40 will result in a balance of $190,254. (You will have contributed just $42,000). Saving $250 from age 40-60 will cost you $60,000 and will result in a balance of $133,918.
  7. (C) – Contact each of the reporting bureaus (TransUnion, Experian, and Equifax) and file a dispute regarding any errors you find. They will work with you to remove any incorrect information.
  8. (B) – Put 20 percent down, and you will reduce your payments to $340 per month. Finance for 48 months instead of 6o and your payments will be about $74 more per month, but you will save just over $1,000 in interest charges over the life of the loan.
  9. (C) – Under IRS guidelines, you can save up to $16,500 in your 401k if you are under 50 years old; $22,000 if you are over 50.
  10. True.
  11. (C) – Typically, accurate negative information will stay on your report for 7 years. A bankruptcy can stay on your report for 7 or 10 years.
  12. (D) – Report your card lost or stolen immediately. In the event that your credit card is stolen in the U.S., federal law limits your liability to $50 regardless of the amount charged on the card by the unauthorized user; however, some card issuers guarantee zero liability if the unauthorized usage is reported immediately.
  13. (C) – In addition to paying off your loan more than 6 years early, you will save more than $34,000 in interest over the life of the loan.
  14. (C) – Even if you have to start small, set a goal to set aside 6 months of living expenses in an account. This can make facing a financial crisis much less stressful and give you time to figure out the next steps to take. The fastest way to get there is to use things like your tax refund, raises, or overtime to get a jump start on your emergency fund.
  15. True.

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