Financial Literacy Test!

I saw a report on financial literacy in America that was a bit embarrassing. So we are going to make sure those of you reading this blog are exceptionally smart when it comes to money. With that, here is a test to get a baseline on your financial fitness:

1. If you have $10,000 earning 6% a year, how much will you have after 5 years?

A: $13,000    B: $14,800    C: $13,382.26    D: $14,762.46

2. If inflation is 3%, how much purchasing power will $10,000 afford you after 5 years?

A: $11,592.74    B: $8,500    C: $11,500    D: $8,587.34

3. If you have $10,000 and the value decreases by 10%, then increases by 10%, how much value do you have?

A: 9,900    B: $10,000    C: $8,800    D: $10,100

4. If you have $250 a month to pay down debt with, does it make more financial sense to pay off the last $250 owed on a credit card at 5% or apply the money on a $2,000 credit card debt at 12%?

A: Pay off the $250 at 5%    B: Pay down the $2,000 at 12% C: Buy a suit

Answers:

1. C. $13,382.26. Don’t forget about compounding interest, dubbed the 8th wonder of the world by Albert Einstein. You would earn $600 the first year, then you would earn 6% on not just the original $10k, but also the $600 you earned the year prior, and so on.
2. D. $8,587.34. Remember that inflation erodes purchasing power. You may think things are getting more expensive as time goes on, but inflation says your money just isn’t worth as much as it used to be.
3. A. $9,900. If you take a loss, it takes a higher percentage to get back to where you were. In this example you had $10,000, it decreased 10% to $9,000, and earning 10% on $9,000 only earned you $900.
4. B. It makes more sense to apply the $250 payment toward the $2,000 credit card debt at 12%. It may feel good to pay off the smaller balance completely, but percentages are percentages. Paying the higher interest debt first always makes more sense than paying the smallest balance first.

How did you do? If you didn’t get them all right, don’t worry about it! These might be basics in financial literacy, but they aren’t commonly taught. You can always learn more about these topics if only with a quick online search.