What's your financial IQ?: Test your money knowledge with these common financial questions
How much common sense do you have when it comes to dollars and cents? While we may be the true north strong and free, nothing in life is actually free so it pays to be financially informed — especially given the fact nearly 50 percent of Canadians are living paycheque to paycheque! So, we enlisted personal finance expert Rubina Ahmed-Haq to test our financial IQs with a series of multiple choice financial questions. Follow along and see how you measure up.
1. How often should you check your credit score?
A) Once a year
B) Once every 3 years
Rubina says: A! Check your score once a year. This keeps you up to date on your financial standing and also helps you fix any mistakes that might appear in your report and drag your score down. Mistakes happen all the time. When you apply for credit, you don't want a simple error to delay your application being approved. Check every year around tax time, you're already thinking about money at that time anyway.
2. How often should you inquire about your investments?
A) Once a year
B) Every 30 days
Rubina says: B! I'm not a big fan of frequently buying and selling stocks, but a monthly check in on your investments is essential. This can mean calling your financial advisor or logging into your account to see how your investments are doing. Ask questions if you don't understand anything and make notes of things you want to cover in your next check up. Nobody cares about your money as much as you! Set all of your qualifying stocks to the Dividend Reinvestment Plan (DRIP) to ensure your investments are really working for you.
3. How does compound interest work?
A) The more you invest, the better you do
B) The earlier you invest, the better you do
Rubina says: B! Compound interest is one of the most powerful tools you can use to grow your money. By investing well and investing early, you can see your investments grow faster than someone who started later even with more money invested. Go into a compound calculator and plug in a number with the average rate of return you expect. Fiddle with the timeline, and you'll see that the longer you are invested, the more money you stand to gain even if you add nothing extra to it!
4. How much money should be in your emergency fund?
A) 3 months' salary
B) 3 months' worth of expenses
Rubina says: B! You should have enough money to cover 3 months' worth of expenses saved in a high interest account. That way, you know nothing in your life will change if, for example, you had to stop working for up to three months. You can also use this money for emergency situations, just remember to plan to repay that money back into your emergency fund once the crisis has subsided.
5. What percentage of your monthly salary should you spend on housing?
A) No more than 42%
B) Up to 32%
Rubina says: B! When a bank looks at how much mortgage you can afford, they make sure no more than 32% of your gross salary is being spent on housing expenses. This includes: principal payments, interest payments, property taxes and heating cost, or what is sometimes referred to by the acronym PITH. You can do this test on yourself before you go hunting for houses.
6. What's the first thing you should do when you get paid?
A) Invest in your retirement fund
B) Pay your bills
Rubina says: A! The most important thing to do with your salary is pay yourself. You have to treat yourself like your own employee. I suggest putting 10 percent of your gross salary into a retirement account. Then, put 15 percent into a short-term savings account or emergency fund if you are still building that up. From there, use the rest of your money to pay bills and expenses. Whatever is left, over you can spend!
7. When should you get a will?
A) When you turn 18
B) When you have assets and dependents
Rubina says: A! Most of us underestimate how complicated finances can get if we were to pass away without a will. Even if you don't have dependents, it's important to have a will and choose an executor so you know who will be in charge of your personal belongings. Whether they are worth anything or not, you want someone you trust to be doing it, so you know they have your best interests at heart. This becomes especially true once you have children. Talk to a family lawyer and an accountant to ensure your assets will be distributed in the most tax-efficient manner, so that your loved ones aren't left with a huge tax bill.
8. What does EFT stand for?
A) Electronically Transferred Funds
B) Exchange-Traded Fund
Rubina says: B! It's a lot like a mutual fund, but tends to carry much lower management fees as it's less actively-managed than a mutual fund. ETFs can hold assets such as stocks, commodities or bonds, and are popular with index investors.
9. True or false: Missing one bill payment can affect your credit?
Rubina says: TRUE! All missed payments are recorded on your credit report and can affect your score. If you are repeatedly playing bills late, this will mean a lower score and you will be considered more of a risk to lenders.
10. How much does retirement living cost?
Rubina says: B! Unless you dramatically change your lifestyle, retirement living costs are pretty similar to when you're working. The only expense that might be less is transportation and the cost of buying business attire. This is why having a retirement savings plan is so fundamentally important.