Pop Quiz: Financial Literacy
Being smart with your money doesn’t require any fancy degrees. It does require keeping an eye on your money and having a basic understanding of the rules of credit, savings, and interest. It’s knowing how to set and reach your goals. How to shop for the best interest rates. How to avoid scams. How to repair your credit.
Curious to test your Money IQ? Let’s get started!
- When should you make a budget?
- When getting ready to make a major purchase like a house or a car
- At least once a year
- Every Month
- Never! Those things are boring.
Answer: Every Month
Yep, every month, at least. And the truth is you might need to do it even more than that. Budgets are always a work-in-progress and life has a habit of throwing things at us when we least expect it. Think of it like brushing your hair. Sure you get it looking all nice, but then there’s wind, and humidity and bed-head…
- How much money should you have in an Emergency Fund?
- Enough to pay your bills for 1 month
- Enough to cover your living expenses for 3 – 6 months
- Enough to pay expenses for 1 year
Answer: The general recommendation is to set aside enough in savings to cover 3 – 6 months of your normal living expenses. That will give you a little breathing room in case you lose your job or be enough to cover things like emergency medical bills or the refrigerator or hot water heater going out unexpectedly. Of course, if you’re normally spending $2000 or more each month – the idea of coming up with $6000-$12,000 can seem overwhelming. The key is to start putting something aside. Start small. Make a plan to get to at least $400 in an Emergency Savings account. Once you reach that, aim for $1000. And then $2000 and on up ‘til you reach at least 3 months-worth.
- A Credit Report is?
- Your Credit Score
- A record of all your bills and how much you owe
- A list of all your financial assets and liabilities
- A “report card” on how you manage your credit accounts
Answer: Your Credit Report is like a ‘report card’ on how you’ve managed your credit accounts. It’s a detailed report showing who you’ve had credit with, how much you’ve owed them and how and when you’ve paid your bills with them. If you’ve been late with payments, it’s in there. If you’ve filed bankruptcy, it’s in there. If you’ve had garnishments, it’s in there. If an account has gone into collections, it’s in there.
- Your Credit Score determines if you will get a loan.
Lenders look at a lot of things when determining if they’ll make a loan to you. They’ll review your credit report carefully to see if you’ve kept up on all your payments. They’ll review your income and weigh that against how much you owe on other credit accounts such as credit cards, car loans, student loans or house payments. And they’ll want to know what you’re planning on using the loan for.
One thing they don’t really look at is the actual Credit Score. It’s a little like saying it’s “hot” outside. It gives you an idea – but is “hot” 80 degrees or 110 degrees with 80% humidity?
Your Credit Score is only used to determine the interest rate you’ll be paying if they agree to the loan.
- Negative financial information (not including Bankruptcy) can stay on your credit report for how long?
- 2 years
- 5 years
- 7 years
- Forever (and then some…)
Answer: 7 years
Yeah, that’s a long time. But it’s not forever. By law, negative history such as late or missed payments can be reported for up to seven years from the date of the delinquency. Foreclosures and account charge-offs can remain for 7 years. Collections are slightly different – they can stay on for seven years plus 180 days from the missed due date that caused the collection.
On the upside – good financial history can stay on your report indefinitely!
- What is the best way to improve your Credit Score?
- Close or cancel your credit cards
- Apply for a new credit card or credit builder loan
- Use a credit repair company to clean your record
- Pay your bills on time each month
Answer: Pay your bills on time
The single most important thing you can do to protect or improve your credit is to pay your bills – all your bills – on time, every month. Paying on time as you promised to makes up more than 1/3 or your credit score. So if you have missed or late payments, you’re taking a huge chunk out of your score.
- You receive a call from the IRS telling you they’re having a problem depositing your check and need you to verify your bank account information. What do you do?
- Give them your information and have them repeat it back to you to make sure it’s correct
- Ask for the caller’s name and position and don’t give any information until you get it
- Hang up.
Answer: Hang up. The IRS doesn’t make calls like that. They also won’t send you an email requesting personal information. In fact, no reputable business will. So if you get a phone call or email asking you to ‘verify’ personal information such as your passwords, social security number or bank or credit card information, hang up. If you’re worried there might really be a problem, contact the company directly and ask to speak to someone in customer service.
- You put your money in a 401(k) through your job. When are taxes paid on that money?
- 401(k)s are not taxable.
- When you invest (deposit) OR when you withdraw it, but not both
- When you invest AND when you withdraw
- When you reach age 65
Answer: When you invest OR when you withdraw, but not both.
What’s that old saying – “nothing in life is certain but death and taxes”? So you can be sure the government will take their cut. When they take it depends on what type of 401(k) your job has set up. If it’s a ‘traditional’ 401(k) or IRA, taxes will be taken out when you withdraw – meaning you’ll have more in the account to earn interest on. If it’s a Roth 401(k) or IRA, taxes will be taken out up front – which means you won’t have to worry about paying taxes when you’re ready to withdraw the money later. Either way, it’s a good deal and you SHOULD be putting money in a retirement account as soon and as often as you can!
- Compound Interest is money:
- Paid or earned on the principal
- Paid or earned on the interest
- Paid or earned on both principal and interest
- I don’t know but it sounds bad
Answer: Compound Interest is money earned – or paid – on both principal and interest. In simpler terms, it’s interest on interest. For example, if you put $100 in a savings account that earns 2% compounded interest, in a year you’ll have $102 in that account. And no, that isn’t a lot. But you didn’t have to do anything to earn that $2, your money earned it all on it’s own.. And the following year you’ll earn 2% now on the $102. And so on and so on…
Of course the reverse is true when you’re paying compound interest – say on a loan or credit card. In that case, you’re paying interest on interest for any unpaid balanced. And that can start racking up the debt fast. So be sure to read the fine print!
- What does APR stand for?
- Always Pack extra underweaR
- Annual Percentage Rate
- Actual Payment Rate
- Annual Penalty Rate
Answer: Annual Percentage Rate.
APR is a loan term and it refers to the total “cost” (interest and fees) you’ll pay over the course of one year for taking out that loan. For example, if you take out a loan of $1000 with an APR of 10%, you would pay $100 in interest and fees over 1 year.
APY – or Annual Percentage Yield – is a similar term but is used with savings accounts or investment accounts. APY refers to the amount of interest you’d earn in a year.
Your credit card is lost or stolen. What is the first thing you should do?
- Call your bank
- Call your credit card company
- Call the police
Answer: Call your credit card company.
Honestly, crying or cursing always happens first. But once you get that under control, call your credit card or debit card issuer right away! That way they can cancel or put a stop on your card immediately to stop anyone from using your card. They can also help you review your account to see if the card has already been used and begin the process of disputing any unauthorized charges. And if there are unauthorized charges – your next step is to contact the FTC to report the fraud.
So, how’d you do? Are you a Money Whiz? Did you learn a few things you didn’t know before?
When it comes to money, sometimes the hardest part is even knowing what questions to ask. So hopefully we’ve stirred your curiosity a little. Don’t be afraid to ask questions. We’re here to help you find the answers. Make an appointment to speak with one of our financial coaches or head over to our Facebook and YouTube pages to find out more. The more you know, the better choices you can make!
Hope Johnson, Financial Education Coach