Financial Wisdom Quiz
Check yourself – Are you in control of your money, or does your money control you?
Take this quick quiz to see how well you manage your money.
- Which of your expenses are “needs?”
- How much are you paying in interest? How much is the real cost of your debt?
- What will your car be worth when it’s paid off? How much will you have paid for it?
- Do you know the difference between whole life and term life insurance?
- Do you know the consequences of student loan debt?
- Are you working for money, or is your money working for you?
How well did you score? Now that you’ve thought about these things, scroll down to see the correct answers. If any of this is news to you, consider taking one of our classes or signing up for financial coaching to get you on your way to financial liberty and success!
Q: Which of your expenses are “needs?”
A: Needs are necessities. The only true needs we have are food, shelter, transportation and clothing. Everything else is a “want.” Our society is very spoiled about what we consider needs, and we use the word, “need,” flippantly. A need is a basic provision. Now, to be more specific, and to be honest, about “true needs:”
Food means three meals/day of healthy food. It does not mean instant or prepared foods, coffee, desserts, steak or eating at restaurants.
Shelter is not a palace. It is four walls in a relatively safe place with a good roof overhead. It includes basic utilities—minimal heat & cooling, water, trash and electricity. It does not include cable TV or Internet. Many, many families with 4+ children have survived nicely in 900 to homes.
Transportation doesn’t mean a new car because you “need” good air conditioning. It means two to four wheels or two legs that get you back & forth to work and to the grocery store. This can include bikes, busses, and commuter trains.
Clothing does not mean new designer clothes every month. Most people have enough clothing to get by for a couple years. Clothing means replacing what wears out.
Once you’ve covered your needs and have paid off your debts, you can increase your investments into these things and live more comfortably. Once you’re investing for the future, you can increase even more. But if the creditors are knocking at your door, cut back!
Q: How much are you paying in interest? How much is the real cost of your debt?
A: A real eye-opener is to add up all the interest you’re paying monthly. This takes a little effort because most debts are calculated on an APR, or annual percentage rate, not monthly. But a quick and dirty way to do this, which produces close-enough results, is to divide the interest rate by 12. For example, 15% APR is 15/12, or 1.25/month. Put that on a $10,000 balance and you have 125/month. If you own a house or car, you can get an amortization table from your lender which shows how much of your monthly payment goes to interest each month. Or you can find free amortization calculators on the web that will give you the same information . Google “free amortization calculator.”
Add all your interest up, and when you get up off the floor, consider how much you’d be earning if that money was in a 12% mutual fund. A typical home with a $150,000 home loan with 25 years to go at 6% interest, $30,000 in car debt with 5 years to go at 8% interest, and $15,000 in credit card debt at 18% interest.
Credit card: $150
If this money were put into a 12% fund for 10 years, you’d have $242,500.00. The real cost of your debt is a quarter of a million dollars! Debt = Bad!
Q: What will your car be worth when it’s paid off? How much will you have paid for it?
A: New car loses thousands of dollars in value as soon as you transfer ownership from the dealer to yourself. This alone makes a brand new car a bad investment. You’re paying thousands of dollars to choose the type of hubcaps and upholstery you want. And usually you can’t get what you want anyway because you’re limited to supply!
Adding salt to the wound, a typical car loses 60% of its value in the first four years. When you drive off a dealer lot with a financed car, you’ll owe more than the car is worth for the next 3.5 years. If the car is totaled during that time, or if you need to sell it, you lose until you meet the breakeven point (Don’t forget to factor in inflation!).
If you buy a $30,000 car (let’s assume $30,000 includes all sales tax & other costs) at 8% interest for 5 years, you will pay $606/month and your total cost will be over $47,500…and your car will be worth $12,000. Good deal? Not!
Q: Do you know the difference between whole life and term life insurance?
A: Whole life is a low-interest savings account. It continues until you die or cash out. If you die, it pays out a set amount, sometimes with interest, and you lose your investment. If you cash out, you get your principle back plus a little interest.
Term life is far less expensive, and it has a specific duration. Your premiums are not refundable, and when you die, it pays out a set amount. You can’t cash out term life; it’s like auto insurance. It sounds worse than whole life, but here’s the catch:
Term life can be a fraction of the cost of whole life, so it frees up funds for investment. Since you only need life insurance for a set amount of time, it’s not a good idea to throw money into a low interest rate policy once you financially stable enough to be self-insured, or when you’re older and need the money.
Here’s an example: A friend wants life insurance for the next 20 years, after which his house will be paid off, he’ll be totally out of debt, and his investments will cover all needs for himself & his dependents.
He is able to get a whole life policy for $500/month that would give him a $500,000 settlement should he die. If he waited 20 years and then cashed out, he’d have about $132,000.
He is also able to get a 20-year, $1,000,000 term life policy for $100/month. This would allow him to put the $400 difference in policy costs ($500 for whole life vs. $100 for term life) in mutual funds, and earn 12% interest, which is very reasonable in long-term investments. In 20 years his policy would end and there would be no cash value…but his mutual fund investment would be just under $400,000! He’s a winner! He has double the coverage and three times the final cash-in-hand!
Q: Do you know the consequences of student loan debt?
A: Any debt to the government is a debt you must take seriously, and this includes student loans. Student loans are the highest risk debt a person can take on. You can accrue a huge gambling debt and, through bankruptcy (never recommended), get out from under it. But you can never get out of your student debts—this is serious business! As with taxes, if you can’t make your payments, you will be shown no mercy. I strongly recommend students and parents of students read Zac Bissonet’s “Student Loan Disclaimer.” Did I mention the word, “serious?”
Q: Are you working for money, or is your money working for you?
A: If you’re in debt, you’re working for your money. When we take out debt we are using someone else’s money to get what we want today, so naturally we have to pay them for the use of their money. That’s what interest is.
Imagine a life in which the money you’re paying to someone else for that benefit (interest) is instead invested in a mutual fund and it pays you! Instead of losing 12-24% interest or more, you’re earning 12% without any effort on your part! If you can afford to pay interest, you can afford to earn money without effort!
Get out of debt and save!