Money Literacy Quiz
5 questions to test your knowledge.
Imagine having a $100 in savings account earning .04% interest and inflation is at 2%. After one year, would you have more money or less money?
Inflation is the primary reason for the increase in the prices of goods and services. Therefore, since your savings account didn't grow by what the cost of goods and services increased by, you actually lost money. 0.04%interest - 2%inflation = -1.6% loss. It's a tricky concept to grasp because your savings account won't go down, but you will have less spending power.
Which type of Individual Retirement Account (IRA) do you typically fund with pre-tax dollars? Traditional IRA or Roth IRA?
Traditional IRAs are funded with pre-tax dollars, and Roth IRAs are funded with after-tax dollars usually. The exception is if an individual or a couple filing jointly has too high an earned income, they may not be able to contribute to a Roth IRA at all or take a tax deduction with a Traditional IRA. You still may be eligible to contribute, but not with pre-tax money. Always consider consulting with a tax advisor.
What earns a lower interest rate, a 30 year mortgage or 15 year mortgage?
A fixed 15 year mortgage will usually offer the lower interest rate. It will have a larger mortgage payment, but in the long run you will save yourself a bunch of money.
What would be the maximum percentage of your gross income a financial advisor or coach would recommend you spending on a mortgage or rent?
30% is the maximum most financial professionals would recommend. A lower percentage wouldn't hurt, especially if you working to pay off debt. The 30% rule is often what landlords, and loan officers use to determine if they will rent or loan to you.
If you have a $100 in an investment account earning 2% average over 3 years. How much will you have?
The power of compounding interest enables individuals to grow their wealth and highlights the importance of investing.
If you have interest on debt, which also typically compounds, it will dig you further into the hole if you don't at least make minimum payments. This is why folks struggle with paying off debt.