Established in 2004 by the United States Senate, April is National Financial Literacy Month. The overarching goal of Financial Literacy Month is to teach Americans how to establish and maintain healthy financial habits and to make informed financial decisions. So, in honor of this great initiative, I’ve compiled and developed a listing of 10 Financial Literacy questions inspired by the things I have learned (and desire to learn more about) in my playbook to financial freedom.
Take our Pre-Game Quiz designed to increase your knowledge, change your behavior, and elevate your future!!
1. How much of your income should you spend on monthly housing expenses?
A. 50 percent
B. 43 percent
C. 30 percent
2. Will you retire with more money if it’s invested in a…?
A. Roth IRA
B. A Serta mattress
C. Traditional IRA
3. Paul is single, childless, in good health and drives a nice car. Which insurance could he most likely do without?
A. Life insurance
B. Health insurance
C. Auto insurance
4. How long should you keep tax records?
A. Seven Years
B. Three years
C. I personally do not keep my tax records. I rely on my CPA or the tax software to maintain my records.
5. How big should your emergency fund be?
B. Two months of rent or mortgage payments
C. Six to eight months of living expenses
6. What are the best uses of your 2013 tax refund or annual bonus?
A. Pay off or reduce consumer debt.
B. Start or build your emergency fund.
C. Contribute to your retirement fund by opening a Traditional or Roth IRA account.
D. All of the above.
7. TRUE or FALSE. More earnings mean more wealth.
8. TRUE or FALSE. Removing your name from mailing lists will help to guard against identity theft.
9. The following debt reduction methods positively affect your credit report, except:
A. The debt snowball method
B. The debt avalanche method
C. Filing for Bankruptcy
10. How many times per year can you access your free credit report?
A. Once per year.
B. Only when you’ve been turned down for a loan or credit card.
C. Three times per year.
1. (C) 30 percent. As a general guideline, you should allocate 30-35% of your after-tax income to cover housing expenses which include rent/mortgage, insurance, taxes and maintenance.
2. (A) You will have more money with the Roth IRA. The Roth IRA is tax free and you will have to pay taxes on the growth in a traditional IRA; therefore, if you were to place the same amount of money into both vehicles, you would be able to keep all the money withdrawn from the Roth IRA.
3. (A) Life insurance is correct. You only need life insurance if you have someone depending on you financially. Paul is not married and childless, so he doesn’t need it. However, he will need health insurance and auto insurance to protect himself against disaster.
4. (B) The IRS recommends taxpayers keep their returns and any supporting documentation for three years after the date of filing; after that, the statute of limitations for an IRS audit expires.
If you’ve under-reported income by 25 percent, however, the IRS can go six years back, or seven if you claim a loss for bad debt or worthless securities.
If you don’t file, or if you file a fraudulent return, the IRS has no statute of limitations; so it may be best to keep your records indefinitely.
5. (C) Six to eight months of living expenses. While the amount varies according to your living costs, your other assets, and whether you are a one- or two-income household, a great goal for your emergency savings is having enough to cover six to eight months of living expenses.
6. (D) All of the above.
7. FALSE. When people acquire more money, they almost immediately start spending more money. This aligns with the examples of former professional athletes and lottery winners who go bankrupt within two to three years after retiring or receiving gambling proceeds.
8. TRUE. Removing your name from mailing lists may help minimize the risks associated with identity theft. Some identity thieves will steal your mail or rummage through your trash in order to obtain your personal information. You could be at risk of identity theft if you don’t have a locked mailbox, and thoroughly shred all mail and documents before throwing them out. To stop unsolicited mail, call 1-888-5-OPT-OUT (1-888-567-8688) or visit www.optoutprescreen.com.
9. (C) Filing for bankruptcy. A bankruptcy filing may remain on your credit report for up to 10 years, lower your credit score by 200 points or more, and make it more difficult to obtain loans or low-interest credit cards. If you are struggling to pay your debts, consider other alternatives like, paying on your own, working with a credit counseling agency, negotiating a settlement, or debt consolidation.
10. (C) Three times per year. If you are denied credit based on something in your credit history file, you are eligible for a free credit report from the reporting bureau used. However, regardless of your credit activity, you can get one free credit report each year from EACH of the three credit reporting agencies (Experian, TransUnion and Equifax). You can access your free credit report at www.annualcreditreport.com.
SCORING (Count the Number of Incorrect Responses)
1-2 – Way to go! You are at the top of your financial game! Be sure to share your knowledge to educate others!
3-4 – Pretty good, but there is room for improvement. Pay attention to the questions you answered incorrectly, and consider focusing more on these areas (e.g., debt, retirement, investing, etc.)
5 or more – There’s more for you to learn, and nothing is wrong with that! Be sure to visit our Facebook page this month to brush up on more topics.
We want to hear from you. Reply below and share your score with us. Also, let us know if there are financial literacy areas you’d like this platform to address moving forward.
If you are interested in more, “Like” us on Facebook and plug in for the Financial Literacy Question of the Day (QOD) through the month of April!