Think you're smart about money?
Think you're smart about money?
Maybe. But unless you're regularly learning and refreshing your knowledge, the latest information about spending, savings and investing might pass you by.
And the best way to pass on money smarts to children probably isn't in the classroom, but at home.
The American Bankers Association says that while personal finance instruction has increased in schools, most young people are not receiving enough education to be financially "confident and capable."
"Every adult in a child's life needs to take leadership in helping them build money skills that will last a lifetime," Frank Keating, CEO of the association, said in announcing a recent financial literacy effort.
Citi recently released a survey that found 9 of 10 parents are teaching their children about money but more than half are uncertain about their children's financial future, and 29 percent say their children only have a fair or poor understanding of money and saving.
Some money maxims haven't changed; for example, "spend less than you earn," "differentiate between needs and wants" and "pay yourself first."
Take this quiz to see whether you should brush up.
QUESTION: If you were in a casino and began gambling with $100 and won $900 more, then lost it all, how much money did you lose?
ANSWER: Many people would say $100, the money they went to the casino with. But the answer is $1,000. Because of "mental accounting," consumers often don't consider gambling winnings or other windfalls equal in value to money earned at work. Of course, the dollars are worth the same — something to keep in mind for that tax refund and other windfalls that seem like "found money."
Q: The best order of savings priorities is kids' college first, then retirement.
A: False. Savings for children's college is a noble goal, but you can't take out loans for retirement like you can for school. So retirement is the priority.
Q: Comparison shopping is a waste of time, because most prices are about the same.
A: False. Prices on many goods, especially services, vary widely, and it's worth your time to compare. A corollary is to spend time researching goods and services to get better value for your buck. Resources include Consumer Reports, ConsumerSearch.com, Cheapism.com, Amazon product reviews, Angie's List and Consumers' Checkbook.
Q: Which is better, a tax refund of $50 or $3,500?
A: Ideally, you would rather have use of your money through the year - and potentially earn a little interest - than have Uncle Sam send back a lump sum because you overpaid. A refund of $50 is better. See the IRS withholding calculator at IRS.gov.
Q: If the annual interest rate on your savings account is 1 percent and annual inflation is 2 percent, after one year would the money in the account buy more, less or the same?
A: The answer to this question by the FINRA Investor Education Foundation is "less," because consumer prices, called inflation, are growing faster than your money. That's why ultraconservative investments that provide lower returns than inflation are actually risky.
Q: A seven-year car loan is the best option because payments are lower.
A: False. It's true that payments will be lower than for a shorter loan, but you'll pay more interest, and it's a bad idea to take such a long loan on an asset that plummets in value like vehicles do. A rule of thumb is the 20/4/10 rule: a 20 percent down payment, loan term of four years or less, and payments plus auto insurance not to exceed 10 percent of gross income.
Q: Spending on vacation travel and concerts is wasteful.
A: False. The point of paying attention to money leaks in life is to redirect cash to things you truly care about, which might be a trip to the Caribbean. Research shows people are happier when spending discretionary money on experiences, especially with other people, than on more stuff.
Q: If an investment loses 50 percent of its value in one year, what percentage must it earn in the second year to get back to even?
A: It must earn 100 percent, or double in value.
Q: Is life insurance more important for high- or low-income families?
A: Trick question. The need for life insurance isn't related to income, though the amount of coverage you need might be. The need for life insurance depends on whether someone relies on your income and would be hurt financially if you died. Families with one working parent are a prime example. Single or childless people with a working spouse? Maybe not so much.
Q: When getting out of debt, you should close credit card accounts as soon as you pay the balance to zero.
A: False. It will hurt your credit scores. The length of your credit history and how much available credit you're using are components of credit-scoring models. Closing accounts hurts on both counts. But if you can't trust yourself not to run up big balances, closing the accounts could be a benefit.
Q: What is the primary difference between a traditional individual retirement account and a Roth IRA?
A: There are several differences, but the biggest is about when you pay taxes on the money, before or after the money grows. With a Roth, you contribute after-tax money but withdraw money tax-free. A traditional IRA is the opposite: You get a tax break on money that goes in, but you are taxed on money you take out at retirement.
Q: Your net worth is your total annual pay minus taxes.
A: False. That's your net income. Net worth is your assets minus your liabilities - if you liquidated your life and sold everything you own and paid all debts, what would you be left with?
Q: Negative information, such as not paying your bills on time, is removed from your credit report after 12 months.
A: False. That stays on for seven years for most credit dings and 10 years for a personal bankruptcy.
Q: If you pay for a restaurant meal with a credit card and an unethical waiter copies down your credit card number and fraudulently uses it to buy a $600 television, how much money comes out of your pocket?
A: Probably none, because most major credit card issuers absolve you of all liability if it's a clear case of a stolen card or number.
Gregory Karp, the author of "Living Rich by Spending Smart," writes for the Chicago Tribune. Readers may send him email at firstname.lastname@example.org.