What’s Your Money Sense?
By Wendy Turk
The school year is coming to an end, which reminds me of all the final exams I had to take so many years ago. So why not take a quick quiz to test your financial knowledge? I promise it’s more Cosmo Quiz and not so much Econ final. Take the quiz here:
1. What does IRA stand for?
A. Investment Retirement Account
B. Individual Retirement Account
C. Individual Residual Annuity
D. Insanely Ridiculous Amount of savings
2. Give yourself the number of points in parenthesis for each true statement:
A. I have an emergency savings account (1)
B. It has at least $5000 in it (1)
C. It has at least 3x my monthly expenses (1)
D. It has 20x or more of my monthly expenses (-1)
3. If I gave up my daily latte @ $5 a pop for one year (non-leap year), I’ll save
A. Nothing, because life will be miserable
4. If I gave up my avocado toast @ $8 a pop in addition to my latte for one year, and invested this money for 30 years and earned an annual 6% rate of return, I’d have ______ at the end of 30 years.
A. A house
5. If you’re born after 1960, full Social Security Benefits begin at age
D. Who knows? I’ll never receive Social Security
6. True or False: Stocks are ownership in a corporation.
7. Disability insurance
A. Pays part of your income when you can’t work because of illness or injury.
B. Pays part of your income when you lose your job.
C. Covers your medical costs.
D. Uses talking ducks in commercials.
8. A college graduate earns ______ times more than a high school graduate.
9. Tax-deferred means
A. I’ll never pay taxes on the amount
B. Taxes are paid at a future date instead of the period in which they are incurred
C. Taxes are paid now to avoid taxes in the future
D. Someone else pays my taxes
10. The effect of inflation causes
A. An increase in prices for goods and services
B. A decrease in the value of money
C. Both A and B
D. Neither A or B
11. The following factors are included in my credit score
A. Length of Credit History and Credit Type
B. My driving record
C. My savings and investments
D. How much the bank liked me
12. I like compound interest because
A. It sounds cool
B. It adds diversification
C. It’s the interest in my account earning its own interest
D. I earn more for working more hours
How’d You Do?
1. B. IRA stands for Individual Retirement Account. Individual taxpayers can contribute up to 100% of their earnings up to a maximum specified dollar amount ($5500 in 2018 under age 50; $6500 in 2018 over age 50). There are several types, including Traditional, Roth, SIMPLE, and SEP IRAs that vary in eligibility and taxability.
2. Congratulations if you have an Emergency Savings account! We typically recommend 3-6 months’ expenses in case of unemployment, disability, or other unforeseen financial emergencies. If you have greater than 6 months’ expenses, you may be missing out on investment growth opportunities.
3. C. This question was simply $5/day x 365 days in the year. But did you know you were spending that much on lattes?
4. D. $8 for avocado toast + $5 lattes x 365 days = $4745; Invest $4745 for 30 years @ 6% annual rate of return = $27,252.87. So maybe that’s a house in some parts of the country.
5. C. The full retirement age has increased depending on the year you were born.
6. True. When you own a stock, you own a piece of the issuing company.
7. A. There is short-term and long-term disability, both designed to supplement your missing income if you’re injured or ill. Short-term disability is typically meant to last up to a year, while long-term disability is for 5-10 years, or possibly up to retirement age.
8. B. In 2015, college graduates earned, on average, 56% more than high school graduates. This gap has been growing, especially since the Great Recession.
9. B. Tax-deferred savings and investments accumulate tax free until you take receipt of the gains, so for example, in a tax-deferred retirement account such as a Traditional IRA or 401(k), you won’t be taxed on the contributions you make this year, but you’ll pay taxes on the money once you start taking withdrawals from the account.
10. C. Inflation is the rising price of goods and services over time, which means your dollar won’t be worth as much as it is today.
11. A. Credit scores are based 35% on Payment History (late payments, defaults, etc.), 30% on the Amounts Owed, 15% on the Length of Credit History, 10% on Credit Mix (credit cards vs. installment loans vs. mortgages, etc.), and 10% on New Credit.
12. C. Compound Interest is interest paid on both the principal and on accrued interest, so it’s your money earning its own money without you needing to earn every dollar you save and invest. Compare this to simple interest, which is interest paid only on your principal. Over time, the difference can be profound as illustrated in this graph:
0-4: Financial Freshman
Everybody starts somewhere! Learning some of the basic financial definitions will help build a solid foundation to understand your own finances and where to go from here.
5-9: Money Minder
Like a Pinterest user who pins a ton of things but may never make them, there are financial concepts and words you may hear or see, but you wouldn’t be able to explain if someone asked.
10-14: Numbers Know-It-All
Kudos for your financial knowledge! Make sure you put your smarts to action to build your wealth.
Whatever your score, it’s always helpful to get the ball rolling with a little help from your friendly financial planner too!
Securities offered through LPL Financial, Member FINRA/SIPC.
Investment advice offered through Gerber Kawasaki Inc, a registered investment advisor and separate entity from LPL Financial.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which course of action may be appropriate for you, consult your financial advisor. No strategy assures success or protects against loss.
Gerber Kawasaki, 2716 Ocean Park Blvd. #2022 Santa Monica, CA 90405. Contact us at (310) 441-9393.