Yahoo Finance Quiz Yourself on Financial Literacy With These 8 Expert Questions
Ours is a nation with shockingly poor financial literacy. Many Americans don’t comprehend common, elementary financial terms such as “Roth IRA” and “mutual funds.” The lack of understanding money and all the ways in which it does and can operate points largely to scarce teachings in school, which is why many argue for a comprehensive education here.
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Though we really should be taught financial literacy in school in order to navigate, organize and build wealth, the onus is on us to take action and get informed. If you’ve been doing your homework and brushing up on all things money, you may be wondering, “How financially literate am I?”
Quiz yourself on personal finance with these eight expert questions.
How Much Cash Should You Keep in an Emergency Fund?
The unexpected will happen, and in some cases, it will cost you. So it’s critical to have an emergency fund; but how much should you keep in it? Do you know?
“In general everyone should have enough liquid capital to last for at least three months worth of living expenses such as rent/mortgage, food, gas, utilities or your fixed costs,” said Nicholas Gerber, CEO at Marygold & Co.
What Is the Rule of 72?
Do you know what the rule of 72 is? As Erika Kullberg, personal finance expert and founder of Erika.com, explains, it’s the measure of how long it will take for an investment to double at a fixed annual interest rate.
How to determine your rule of 72 is pretty simple.
“Simply take 72 divided by the expected interest rate,” Kullberg said. “For example, 72 divided by 8% would give you 9 years to double your investment.”
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How Does Compounding Interest Work?
Compounding interest is key to building wealth — and it’s incredibly savvy to start thinking about and practicing this as early in your financial journey as possible.
“Understanding compounding is important to appreciate the value of starting to save early,” Kullberg said. “Time is your greatest resource when it comes to investing. Interest compounded is interest calculated on the initial principal and on the interest accumulated on all of the previous time periods.”
What’s the Difference Between a Roth IRA and a Traditional IRA?
Retirement planning is critical, and you can get a major leg up by participating in a Roth IRA or traditional IRA.
“Which one you choose could make a real difference to your tax bill, and possibly how much you save for your retirement,” Kullberg said.
Here’s how the two differ: “Contributions with after-tax dollars are made to a Roth IRA, while money is contributed to a more traditional IRA with before-tax dollars, sometimes with a tax deduction,” Kullberg said. “In retirement, withdrawals from a Roth are tax-free, while money from a traditional IRA is taxed.”
Can Debit Cards Help You Build Credit?
Maybe you already know that you can build credit with a credit card, but can you build credit with a debit card? Nope!
“Common misconception,” said Aria Deshe, director of strategy and impact at Arro Finance. “Debit cards don’t report to credit bureaus because it is not a loan, it is your money in the bank.”
What Is the Top Factor in Your Credit Score?
A few ingredients go into building and maintaining a healthy credit score, but there is one that is the most significant.
“The most important factor is making on time payments,” Deshe said. “There are other factors that make up your score, but consistently making your payments on time has the biggest impact, and a missed payment stays on your report for seven years.”
How Often Does the Stock Market Drop 10% or More From Its Highs?
The stock market is a mercurial beast, but there is a high-level pattern to be detected. Know the answer to this question.
“About half of all years (in the last 50) have seen the stock market drop at least 10%. About a quarter of all years see a decline of 20% and more,” said Mark Wilson, founder and president at MILE Wealth Management. “Understanding the volatility of stock markets should help investors: (1) keep some cool when (not if) these periods come and (2) properly position the amount of stocks in their overall portfolio.”
Can Checking Your Credit Score Often Make It Go Down?
No, checking your credit score often doesn’t make a dent whatsoever; in fact, it’s a good habit to get into and helps you catch errors.
“Checking your own credit score doesn’t impact your score, so monitor it frequently to make sure you’re on track to reach your credit goals,” Deshe said. “You shouldn’t pay to see your credit score — everyone is entitled to at least one free report per year from annualcreditreport.com.“
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