Managing your finances has become especially challenging. Decisions are likely to be influenced by record low home mortgage interest rates, new tax breaks from government stimulus programs and the volatile stock market.
Are you up to taking a short quiz to test your knowledge of some key aspects of family financial management? Give it try and see how you do. (Answers at bottom):
1. What is the biggest difference between an Individual Retirement Account (IRA) and a Roth IRA?
(a) The investments you can choose from — stocks, bonds or CDs (b) The government's treatment of taxes (c) Where you can open an IRA — a bank or brokerage house.
2. What does the acronym APR stand for?
(a) Annual Percentage Rate (b) Average Principal Return (c) Average Percentage Rate
3. What's the difference between a money-market account and a money-market fund?
(a) There is no difference (b) One offers interest gains, the other does not. (c) One is offered by a bank and is insured by the FDIC, the other is not.
4. If I've been automatically enrolled in my 401(k) at work I should be on track with my retirement savings.
(a) True (b) False
5. The interest rate is the most important factor in determining whether I should refinance my home mortgage.
(a) True (b) False
6. The largest single factor that determines my credit score is:
(a) The length of my credit history (b) Amount of debt I owe (c) Whether I pay all my bills on time
7. Of the three credit reporting agencies, I really need to look at just one report a year to make sure everything's OK.
(a) True (b) False
8. If I buy a new car before Jan. 1, 2010, I don't have to pay sales tax on it because that's part of the Obama economic stimulus plan.
(a) True (b) False
9. The broadest indicator of how U.S. stocks are performing is:
(a) Dow Jones industrial average (b) S&P 500 (c) Nasdaq (d) Russell 2000 (e) Wilshire 5000
10. I've pulled a lot of my money out of the stock market waiting for a good time to reinvest. The best sign of a market turnaround, telling me to get back in is:
(2 of 3)
(a) A huge spike in trading volume meaning lots of people are getting back in at once (b) Several days in which volatility has stabilized (c) Markets continue to climb despite news or other events putting downward pressure on them (d) Nobody really knows.
1. (b) The biggest difference is when you pay taxes. All or part of traditional IRA contributions are tax deductible depending on your circumstances and you pay taxes when you make withdrawals from the account. Roth IRA contributions are not tax deductible, but upon withdrawal the earnings and principal are tax free if you've followed all the rules. The mix of investments you may choose are generally the same for both accounts.
2. (a) Annual Percentage Rate. It is the cost of a loan over a year's time, typically including interest, insurance and origination fees (also called points). It's used for home and car loans, and credit cards.
3. (c) A money-market account is an interest-earning savings account offered through a bank and is insured by the FDIC. A money-market fund is short for money-market mutual fund, which invests in short-term debt such as Treasury bills or short term corporate bonds. While their yields are now at historic lows, money-market funds generally offer a slightly higher return than money-market accounts. That's in part because money funds don't face the same overhead costs that banks do from operating branches. While money funds are traditionally not guaranteed, nearly all of them are now. The U.S. Treasury is temporarily insuring money funds through Sept. 18 after one fund recently exposed investors to losses.
4. (b) False. Most advisers would say you must take an active role in managing your account. The automatic enrollment plan likely gets you in at a low amount, often 3 percent of your income. That's may not even be enough to capture your company's match, which means you're leaving free money on the table. In addition, the investments your money is placed in may not match your personal retirement goals.
5. (b) False. Interest rates are historically low and they are a determining factor in how much you'll save on your monthly payment, but there are other important factors. Among them is the upfront cost you may have to pay to get the best interest rate. It's known as points and it represents cash you'll have to come up with to close the deal. The interest rate you'll qualify for also depends largely on your credit score. You'll want to get your credit score, then check with some banks about what interest rate you'll be offered. Then use an online calculator to determine how much you'll save.
6. (c) Paying bills on time is 35 percent, outstanding debt is 30 percent, length of credit history is 15 percent. New credit inquiries and applications are about 10 percent. Other factors like the mix of credit types such as installment loans and personal lines of credit make up the rest.
7. (b) False. There are three credit reporting agencies. They are Equifax, Experian and TransUnion. Federal law requires that they allow you to see your report at least once a year for free. Advisers say to look at all three because they are different. It's best to look at one every four months to monitor your credit throughout the year. Get the free reports at https://www.annualcreditreport.com or call 877-322-8228.
8. (b) False. You have to pay the sales tax when you buy your new car. The benefit comes next year when you will be able to deduct the sales tax on your 2009 tax return, either as an itemized deduction or an additional standard deduction if you don't itemize. The vehicle must be purchased before Jan. 1, 2010. If you make more than $125,000 ($250,000 for married couples filing jointly), the amount you can deduct phases out.
9. (e) The Wilshire 5000 with more than 5,000 companies is considered the broadest measure of the U.S. stock market, tracking nearly all actively traded U.S. stocks. While the Dow may be the most cited index and the most watched by Main Street investors, it includes just 30 companies. The S&P 500 is mostly large companies and is used frequently by fund managers and other institutional investors. The Nasdaq composite index tracks stocks on that exchange. The Russell 2000 tracks 3,000 small companies.
10. (d) Let's go with d on this one. The other three points are perhaps good indicators of a true turnaround but many advisers would caution against waiting on the sidelines and trying to predict the upswing. History tells us most investors miss guessing the bottom most of the time. A long-term strategy that includes diversified investing taking into consideration your level of risk and time frame until retirement are the key points to consider.
0-3: It's never to late to learn. But it's time to get started.
4-5: You show some progress, but how about picking up a few personal finance books or checking out some Web sites.
6-7: This is not bad, but could be better. With a little work you show promise.
8-9: Very good, you should be on solid financial footing.