A Test for Your Financial Knowledge

Ready for your exam?

Why Do You Need to Know?

If you can take your W-2 to a tax filing service and you have money in the bank, is there really any need to know about personal finance?  It seems personal, you say.

Okay, good question.  A quick answer to that is that you are referring to today.  If you had an unexpected expense or lost your job, would you still have money left in the bank?

There are a lot of variations to that question.  So, just for grins and to see if you are still smiling after the test, I will proceed.

What Do You Need to Know?

That is a better question for personal finance.  And you will be wise to take your time and make the effort to learn as much as you can about the subject.

There is a lot to learn.  And the sooner you learn the various aspects of personal finance, the better your future will look!

K.I.S.S. My Money!

K.I.S.S. stands for Keep It Simple Stupid!  And you will be stupid if you fail to act without foreknowledge of the subject.

So, I want you to consider a simple formula for managing money:

            (Income – Expense) x Time   =          Accumulation (or Bankruptcy)

So, why did I put the “or” in the formula?

Example:

  1. Income higher than expense

                             ($1000-$900) x 7 years      =   $700 Plus interest earned

  • Income less than expenses

                             ($900 – $1000) x 7 years    = ($700) plus Credit Card interest plus late fees

                             Not able to pay = Bankruptcy

K.I.S.S. that!

Now for the Short Quiz

I will try to do more of these, later.  For now, I have the following questions:

  1. What is the formula for balancing your check book?

Oops!  Most of you only use a Debit Card.  So, how do you know your available balance if you have ACH payments scheduled?

  • How much interest does your credit card charge?
  • How long will it take you to pay off your credit card if you only pay the minimum payment?
  • How much does life insurance cost if you die?
  • How much does health insurance cost if you get sick?
  • How much interest can you save by paying extra on your car payments?
  • How much interest can you save by paying extra on your credit cards?
  • How much interest can you add to your savings with investments?
  • How much money can you save by buying a used vehicle versus a new vehicle?
  • How much value does a new vehicle lose once you leave the lot?

Your answers are personal and could be eye-opening.  Please write them down.  However, the key to getting the answers lies in knowing that it will pay to give your finances some attention and try to control your costs.

So let’s get real.

Answers (as I see them):

My answers are based on my own observations and experience.  They are short, on purpose.  There is a lot to know.  And knowledge has the power to benefit your future.

  1.  Have a budget recap showing scheduled payments, with dates and amounts, that can be viewed as you reflect on the bank balance and any payments coming due in order to determine how much is left to buy groceries and fuel for your vehicle, etc.
  2. Look at your online credit card statement.  They have to display the interest rate.  It is the Law!
  3. The minimum payment is designed to barely cover the interest expense.  The credit card company wants you to extend the time you take to pay off the balance.  Keep paying that interest.  Does that feel good to you?
  4. You might want to ask your spouse and kids how long they can survive without your income and with the savings you have today.  I am not sure what the conversion rate is for anxiety!
  5. If it is just a cold, it might not cost very much.  If it involves surgery, it could cost tens of thousands of dollars.  If you are feeling lucky, I would just save on the premiums and buy lotto tickets.  Which do you think has a higher chance of happening?  And, by the way, how much savings do you have in the bank?
  6. Interest on a car loan is usually based on the remaining balance at the end of a month.  The faster you pay the principal the less overall interest you will pay.  If you cut the time in half, you will pay less than half the expected interest due to the factor of time.
  7. The same process and calculations apply to credit card debt, only more so since the interest rate is usually much higher.  Which means a bigger benefit for your effort!
  8. Interest on savings accounts only recently started to improve.  And, though not a lot, interest in beats interest out any day!  Investing in items like government bonds, corporate bonds, stock in companies that pay dividends, and so on, will add to the growth of your savings over time.  A worthy subject for study.  You can start small and let time be your partner to grow wealth!
  9. A used car or a new car?  I know what you want.  They do smell good!  However, rich people have learned that vehicles are just an expense, a means of transportation.
  10. When you consider that a new car will lose about 30 percent of its value when you drive it off the lot, that could be a sizeable sum of money.  I know it has the new car warranty.  However, you can buy a warranty for your used car, if you feel the need, for much less than what value you lose in the new car.  Then, you have the sales taxes and loan payments to consider.

Let these questions be a starting point for your own research on making your personal finances go further and help to make your future look more hopeful!

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