Just because you’ve graduated college and secured a job doesn’t mean the learning is over. In fact, getting a foothold in the real world can make you realize how much you don’t know: Suddenly, you have to start saving for the future, while paying off student loan debt and sticking to a budget to ensure your paychecks stretch throughout the month.
Managing these responsibilities requires knowledge.
But if you don’t feel equipped to handle them, you’re not alone. A PwC survey uncovered that only 12 percent of K-12 teachers address personal finance topics at school, and 65 percent say most students don’t receive financial guidance at home, either.
Fortunately, if you didn’t learn how to manage your money at school or home, you can teach yourself. But first, you need to know where you stand—and our financial literacy quiz can help you find out.
Editor’s note: This quiz has been updated to correct the fourth answer in #4 to 403(b) instead of 503(b).
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Results
We're Impressed
Congratulations! You aced this quiz. Continue learning and take measured steps to put your financial knowledge to work. Knowing the right answers is just half the battle—financial success comes from putting that knowledge into action.
Not Too Shabby
You understand some important financial concepts and are well on your way to strong financial literacy. You're making progress but still have some learning to do. Keep seeking reliable information about how to manage money effectively and build wealth, and put y our knowledge into practice. You'll thank yourself later.
You Could Use Some Practice
Okay, so maybe financial concepts aren't your strong suits—yet. But you've come to the right place to learn more about how to manage money and grow your wealth.
Keep reading, and pay attention to where your money's going. As you learn more about saving, budgeting, investing and building wealth, start putting the principles into practice. You may be surprised how quickly you can build confidence—and net worth.
1. Which of the following is NOT a function of the U.S. Federal Reserve:
Correct
While the Fed controls U.S. monetary policy, it’s not responsible for setting tax rates; that’s the job of the Internal Revenue Service (IRS). To accomplish its other tasks, the Fed’s main tool is adjusting interest rates (which, in turn, affects your variable interest credit cards and mortgages). Its ability to keep rates at the optimum level for current economic conditions helps control prices and employment levels.
Incorrect
While the Fed controls U.S. monetary policy, it’s not responsible for setting tax rates; that’s the job of the Internal Revenue Service (IRS). To accomplish its other tasks, the Fed’s main tool is adjusting interest rates (which, in turn, affects your variable interest credit cards and mortgages). Its ability to keep rates at the optimum level for current economic conditions helps control prices and employment levels.
2. How are variable credit card rates determined?
Correct
Credit card providers start with the current prime lending rate, which is based on the target federal funds rate set by the Federal Reserve, and add a certain percentage on top, which is how the bank earns profit.
Incorrect
Credit card providers start with the current prime lending rate, which is based on the target federal funds rate set by the Federal Reserve, and add a certain percentage on top, which is how the bank earns profit.
3. When do variable interest rates on credit cards change?
Correct
Credit card issuers are generally prohibited from raising rates on a card you’ve had for less than 12 months, although there are exceptions. (They must, however, provide you with a 45-day notice.) Otherwise, issuers can change your rate for various reasons, such as changes in the prime rate, poor payment history or a drop in your credit score. That’s just one more reason why paying off credit card debt should be a top priority.
Incorrect
Credit card issuers are generally prohibited from raising rates on a card you’ve had for less than 12 months, although there are exceptions. (They must, however, provide you with a 45-day notice.) Otherwise, issuers can change your rate for various reasons, such as changes in the prime rate, poor payment history or a drop in your credit score. That’s just one more reason why paying off credit card debt should be a top priority.
4. Which of these is NOT a retirement account?
Correct
A 529 plan is a tax-advantaged savings plan for college costs. While socking away money in a 529 plan for your child’s future education can be a great use of your funds, it shouldn’t take priority over saving for your own retirement with a 401(k), IRA, 503(b)—or other savings vehicle.
Incorrect
A 529 plan is a tax-advantaged savings plan for college costs. While socking away money in a 529 plan for your child’s future education can be a great use of your funds, it shouldn’t take priority over saving for your own retirement with a 401(k), IRA, 503(b)—or other savings vehicle.
5. Which of the following is NOT true about ETFs?
Correct
ETFs, or exchange-traded funds, are much like stocks. But instead of representing shares in one particular company, an ETF allows investors to own an index of stocks in several different companies. Learn more about stocks and ETFs here and here.
Incorrect
ETFs, or exchange-traded funds, are much like stocks. But instead of representing shares in one particular company, an ETF allows investors to own an index of stocks in several different companies. Learn more about stocks and ETFs here and here.
6. Which of the following factors does not affect your credit score?
Correct
Your age is not a factor in your credit score, but the length of your credit history, which could be affected by your age, can count for about 15 percent of your score. However, the most important factors in your score are your payment history (35 percent) and the amounts owed (30 percent). If you aren’t happy with your current score, you can often improve it with a few months of focused effort.
Incorrect
Your age is not a factor in your credit score, but the length of your credit history, which could be affected by your age, can count for about 15 percent of your score. However, the most important factors in your score are your payment history (35 percent) and the amounts owed (30 percent). If you aren’t happy with your current score, you can often improve it with a few months of focused effort.
7. Which of these things is not necessary to help you build credit?
Correct
Contrary to popular belief, you do not need to maintain a credit card balance or other revolving debt to build a good credit score. In fact, a regular history of paying off all bills on time and in full will boost your credit score more than carrying a small balance and making minimum payments.
Incorrect
Contrary to popular belief, you do not need to maintain a credit card balance or other revolving debt to build a good credit score. In fact, a regular history of paying off all bills on time and in full will boost your credit score more than carrying a small balance and making minimum payments.
8. If you have multiple credit card balances, the best way to tackle them is:
Correct
There are various ways of successfully paying off debts, but by focusing on the balance with the highest interest rate first, you will save yourself more money over time.
Incorrect
There are various ways of successfully paying off debts, but by focusing on the balance with the highest interest rate first, you will save yourself more money over time.
9. To be prepared for retirement, you should:
Correct
Many advisors recommend putting10 or more percent of your income per year into a retirement account, but your needs in retirement will depend on your income, responsibilities and retirement goals. The important thing is to create a plan, start saving early (or now!) and regularly check your progress to make adjustments as needed.
Incorrect
Many advisors recommend putting10 or more percent of your income per year into a retirement account, but your needs in retirement will depend on your income, responsibilities and retirement goals. The important thing is to create a plan, start saving early (or now!) and regularly check your progress to make adjustments as needed.
10. If you're 30 years old, what percentage of your investment portfolio should include stocks, and what percentage should include bonds, based on traditional guidelines?
Correct
The traditional rule of thumb for investors is to subtract your age from 100 to determine the percentage of stocks you should own in your portfolio (commonly known as the “Rule of 100”). Under that guideline, a 30 year old would invest 70 percent of his assets in stocks because he or she would presumably have more years until retirement and more tolerance for risk.
However, it’s important that you create a portfolio that matches your personal goals, risk tolerance and timeline. So the percentages you choose could be different. Many advisors today also recommend rebalancing your portfolio regularly, regardless of your age, to stay on track toward your goals and make sure the mix still matches your risk tolerance and timeframe.
Incorrect
The traditional rule of thumb for investors is to subtract your age from 100 to determine the percentage of stocks you should own in your portfolio (commonly known as the “Rule of 100”). Under that guideline, a 30 year old would invest 70 percent of his assets in stocks because he or she would presumably have more years until retirement and more tolerance for risk.
However, it’s important that you create a portfolio that matches your personal goals, risk tolerance and timeline. So the percentages you choose could be different. Many advisors today also recommend rebalancing your portfolio regularly, regardless of your age, to stay on track toward your goals and make sure the mix still matches your risk tolerance and timeframe.
11. How much do experts generally recommend setting aside in an emergency fund?
Correct
It’s wise to set a target emergency fund goal of three to six months’ worth of living expenses. That way, if you’re laid off or an unexpected bill comes your way, you won’t be tempted to use your credit card or tap your retirement savings.
Incorrect
It’s wise to set a target emergency fund goal of three to six months’ worth of living expenses. That way, if you’re laid off or an unexpected bill comes your way, you won’t be tempted to use your credit card or tap your retirement savings.
12. How should you respond to stock market volatility?
Correct
Stock market ups and downs are totally normal. The best thing you can do as an investor is to ignore it (even John Bogle says so), and focus on the big picture of reaching your goals.
Incorrect
Stock market ups and downs are totally normal. The best thing you can do as an investor is to ignore it (even John Bogle says so), and focus on the big picture of reaching your goals.
13. If your savings account has an annual interest rate of 1 percent and you have $100 in the account without making any deposits or withdrawals, how much money will you have in the account in five years?
Correct
At 1 percent interest, your $100 will earn $1 per year. But at the end of five years, you will have more than $105 because your interest compounds over time. That means after the first year, you’re also earning interest on the interest earned in the first, second, third and fourth years.
Incorrect
At 1 percent interest, your $100 will earn $1 per year. But at the end of five years, you will have more than $105 because your interest compounds over time. That means after the first year, you’re also earning interest on the interest earned in the first, second, third and fourth years.
