50+ Lifestyles

Test Your Knowledge of Financial Basics

By Richard J. Schillig, CLU, ChFC, LUTCF
Independent Insurance and Financial Advisor

With our focus on Medicare we often are involved with management of financial assets for retirees or soon to be retired. This month we thought it appropriate to ask some basic questions on finances and investing. How well do you understand personal finance? We came across the following brief quiz that we wanted to pass on to our readers just as “test” of our understanding of some financial principles. Grab a pencil and answer the questions…..check your answers. How well did you do?

 

Questions

1. How much should you set aside in liquid, low-risk savings in case of emergencies?

• a. One to three months worth of expenses
• b. Three to six months worth of expenses
• c. Six to 12 months worth of expenses
• d. It depends

2. Diversification can eliminate risk from your portfolio.

• a. True
• b. False

3. Which of the following is a key benefit of a 401(k) plan?

• a. You can withdraw money at any time for needs such as the
  purchase of a new car.
• b. The plan allows you to avoid paying taxes on a portion of your
  compensation.
• c. You may be eligible for an employer match, which is
  essentially getting free money.
• d. None of the above

4. Some, but not all, of the money in a bank or credit union account is protected.

• a. True
• b. False

5. Which of the following is typically the best way to pursue your long-term goals?

• a. Investing as conservatively as possible to minimize
  the chance of loss
• b. Investing equal amounts in stocks, bonds, and cash investments.
• c. Investing 100% of your money in stocks
• d. Not enough information to decide

6. In debt speak, what does APR stand for?

• a. Actual percentage rate
• b. Annual personal rate
• c. Annual percentage rate
• d. Actual personal return

7. Mutual funds are the safest types of investments.

• a. True
• b. False

8. I have plenty of time to save for retirement. I don’t have to concern myself with that right now.

• a. True
• b. False

9. What is/are the benefit(s) of a Roth IRA?

• a. A Roth IRA can provide tax-free income in retirement.
• b. Investors can take a tax deduction for their Roth IRA
  contributions.
• c. Investors can make tax-free withdrawals after a five-year
  holding period for any reason.
• d. All of the above

10. What is considered a good credit score?

• a. 85 or above
• b. 500 or above
• c. B or above d. 700 or above

Answers

1. d. Although it’s conventional wisdom to set aside three to six months worth of living expenses in a liquid savings vehicle, such as a bank savings account or money market account, the best answer is your own situation. If your (and your spouse’s) job is fairly secure and you have other assets, you may need as little as three months worth of expenses in emergency savings. On the other hand, if you’re a business owner in a volatile industry, you may need as much as a year’s worth or more to carry you through uncertain times.

2. b — False. Diversification is a sound investment strategy that helps you manage risk by spreading your investment dollars among different types of securities and asset classes, but it cannot eliminate risk entirely, and cannot guarantee a profit. You still run the risk of losing money.

3. c. Many employer-sponsored 401(k) plans offer a matching program, which is akin to receiving free money to invest. If your plan offers a match, you should try to contribute at least enough to take full advantage of it.

If you selected b as your answer, you’ll note this is a bit of a trick question. Although income taxes are deferred on contributions to traditional 401(k)s, they are not eliminated entirely. You will have to pay taxes on those contributions, and any earnings on them, when you take a distribution from the plan. In addition, distributions taken prior to age 59½ may be subject to a 10% penalty tax. Some exceptions apply.

4. a — True. Deposits in federally insured banks and credit unions are insured by the Federal Deposit Insurance Corporation (FDIC) and the National Credit Union Share Insurance Fund (NCUSIF), respectively, up to $250,000 per depositor, per ownership category (e.g., single account, joint account, retirement account, trust account), per institution..

5. d. To adequately pursue your long-term goals, you might consult with a financial professional before choosing a strategy. He or she will take into consideration your goals, risk tolerance, and time horizon, among other factors, to put together a strategy that’s appropriate for your needs.

6. c. APR stands for annual percentage rate..

7. b — False. Mutual funds combine the money of many different investors in a portfolio of securities that’s invested in pursuit of a stated objective. Because of this “diversification,” mutual funds are typically a good way to help manage risk. However, the level of risk inherent in any mutual fund depends on the types of securities it holds..

8. b — False. Although retirement may be decades away, investing for retirement now is a smart move. That’s because even small amounts–say just $50 per month–can add up through the power of compounding, which is what happens when your returns eventually earn returns themselves. This means your money goes to work for you!

9. a. The primary benefit of a Roth IRA is that it provides tax-free income in retirement. Contributions are subject to income limits and are never tax deductible. Withdrawals may be made after a holding period of five years, provided they are “qualified.” A qualified withdrawal is one made after the account holder dies, becomes disabled, or reaches age 59½, or one in which the account holder withdraws up to $10,000 (lifetime limit) for a first-time home purchase.

10. d. Because different organizations calculate credit scores based on varying factors, there is no single agreed-upon definition of what constitutes a “good” score. Generally, though, a score of 700 or above would likely reflect favorably on someone applying for credit