Are you a personal finance master or a budget neophyte? Show off your knowledge when it comes to these common rules of thumb for saving, planning and just plain owning your financial future.
"A penny saved is a penny ________."
Conventional wisdom - not Ben Franklin - states that "a penny saved is a penny earned," although upon close inspection, the phrase isn't really true. It's a penny you started with that you still have, and you haven't earned another one. But it's a penny you have down the road, so that's something.
Which of the following steps can help protect an elderly relative from fraud?
Seniors - and their retirement nest eggs - are frequently the targets of fraud, scams or dishonest dealings. Families can help protect elderly parents and close relatives by keeping communication lines open and having a second eye on accounts for suspicious activity.
Which of the following is a common piece of advice for investing?
Diversification is an important rule of thumb when investing. Diversifying your portfolio means that if one sector or stock performs poorly, your losses might be mitigated by the sectors or stocks that are doing well.
When using credit cards, what is the best strategy?
Paying off the entire balance means you won't have to worry about high-interest debt from credit cards. It's also a good idea to stick to one or two good cards, as having too many lines of credit can harm your credit score and put you at a higher risk for identity theft.
Which of the following might lower your taxable income?
If you itemize your deductions during tax time instead of taking the standard deduction, you can increase your deduction by giving to nonprofit organizations. If you're on the edge of an income bracket, combining donations with other deductions (like mortgage interest) could theoretically keep you within a lower bracket.
What is the purpose of having a budget?
Having a budget means you can decide where you want to spend your money, while cutting down on things you don't want and need. It will help you meet big savings goals, and means you don't have to feel guilty about "fun" purchases that are in the budget.
What's a commonly recommended amount to have saved for a house down payment?
While it's not necessary to have 20% down, saving enough money for a 20% down payment could save you a lot of money because you won't have to pay PMI (private mortgage insurance) fees.
An ideal emergency savings stash should cover essential expenses for how long?
Any emergency savings stash is better than no emergency savings stash, so it's important to save what you can. As for goals, three to six months' worth of living expenses seems to be a popular choice.
If you're planning to move in two years, is it better to rent or to buy?
Buying a house is usually only a good investment if you're planning to stay in the area for a long time. If you are planning to move to a new city in two years, most advisors say to rent in the meantime.
Which of these factors will prevent you from getting loan approval for a mortgage?
When you apply for a home loan, lenders will look at the amount of debt you have and your income. They often won't give loans that would push your debt to income ratio over 43%, and many stop even earlier.
When considering how much home you can afford, it's import to consider which of the following?
Home costs are more than just the monthly mortgage payment: it's important to consider the upkeep costs of a home and leave room in your budget for those expenses. If you have a partner, it's also important to figure out whose salary is necessary to meet the payment and whether you could still afford the mortgage if one of you couldn't work or chose not to work.
In a single-income family, what type of account lets the non-working spouse save for retirement with tax advantages?
If you're a non-working spouse, you can contribute to a Spousal IRA and get the same tax advantages someone in the workforce can access. But, you have to be married and filing taxes as married, filing jointly.
What should you do if you earn too little money to be taxed?
Filing taxes even if you don't make enough money to pay taxes could mean you get an extra payday: if the government has been automatically withholding money from your checks, you can file and get a refund for what's rightfully yours. You might also find that you get money from tax credits.
In the 50/15/5 budget rule, what's the maximum percentage of your income that should be put toward essential expenses, like rent, food, transportation, etc.?
If you follow the 50/15/5 budget rule, then you'll spend no more than 50% of your income on essentials. The same rule recommends stashing away 15% of your salary for retirement and saving 5% for emergency expenditures.
If you're deciding which loan to pay off first, what should you choose?
In general, it's always a good idea to pay off the loan with the highest interest rate first. Dollar for dollar, that's the loan that costs you most.
What is a wise step parents-to-be can take before having their first child?
Having a child can throw your finances for a loop if you're not prepared. Figuring out benefits, saving when possible, and calculating future costs are all helpful steps to prepare for Junior's arrival.
Which of the following would decrease your credit score?
Your credit score is determined by a number of factors, including the age of your oldest line of credit. Often, closing an old credit account will cause a small drop in your score.
How much of your salary can you spend on rent before you're classified as "rent burdened"?
According to the U.S. Department of Housing and Urban Development, a family is rent burdened if rent costs more than 30% of the household's income. Many financial advisers recommend staying under 25% and point to 15% as a good number for growing your savings.
Which of the following is not recommended for a non-essential purchase?
If there's something you really want (a fun vacation, extra nice car, etc.), one of the best things you can do is save for it or find a side gig to earn enough money to cover it. If that's not possible, waiting for a better time or looking into a low interest loan (if possible) are better options than taking on high-interest debt.
When it comes to 401(k) accounts, which practice should top your to-do list?
If you have a 401(k) through your workplace, contributing up to your employer's matching offer essentially means you get free money. For example, if your employer matches your contributions up to 4% of your income, it's a good idea to at least contribute 4% of your income so you can gain access to that extra cash for retirement.
What kind of account lets you withdraw money tax-free in retirement?
With a Roth IRA, you can contribute earnings that have already been taxed to grow tax-free until retirement. It's the opposite of a 401(k), for which contributions aren't taxed until money is withdrawn.
How much money should you have saved for retirement?
A popular retirement rule of thumb is to have 10x your salary saved by the time you're 64. Many experts recommend having one year's worth of salary saved by the time you're thirty, and going from there.
Which of the following doesn't affect your credit score?
Checking your own credit score is what's called a "soft" inquiry: it won't change your score directly. "Hard" inquiries, like requests from lenders, will only bring down your score if there is a large number of them.
Retirees must wait until they are what age to receive maximum benefits from Social Security?
With a few exceptions, retirees can begin collecting Social Security checks at age 62, but will have their checks cut by as much as 30%. It takes waiting until 70 to receive full Social Security benefits. The rules are complicated, so many choose to consult a professional to determine when to start collecting.
What is the "ten year rule" for cars?
New cars depreciate as soon as you drive them off the lot, so the "ten year rule" came about as a way to minimize the financial impact of buying new. The idea is that it can be worth it to buy new as long as you keep the car for ten years.
What's some common advice regarding student loans?
To prevent student loans from being unmanageable, it's a good idea to take into account how much your starting salary would be in your chosen profession. It's harder to estimate if you don't know what that would be, and may become irrelevant as interest rates and college costs both rise.
You can predict a stock's future performance based on what?
Just because a stock has done well in the past doesn't mean it will do well in the future. Picking stocks by maintaining a good mix of assets is more helpful. Many experts look at a company's policies and long-term plans to make an informed guess on how well it will do.
What's a commonly touted number for how much life insurance you should buy?
This piece of advice is oft repeated because it ensures that if the main income-earner for your family dies unexpectedly, your family will have enough money to get by for a while. Realistically, each situation is different and it's important to run through some potential scenarios before picking the plan that's best for your needs.
You could choose what percent of your portfolio to invest in stocks by subtracting what number from 120?
One popular rule of thumb is to subtract your age from 120 for stock allocation, so that as you age, you shift from stocks to bonds. This rule is less useful when bonds pay much lower interest, but stocks can be risky.
What's a common rule of thumb for 401(k) withdrawals in retirement?
It's never a good idea to base your retirement decisions on one piece of advice, but 4% is a good starting point because it's often a low enough number to keep your nest egg alive for a long time. If your balance dips due to a poor market or if 4% isn't enough for you to live on, you'll need to make adjustments.
If you expect to pay for some or all of your child's education, what type of account should you open to save for it?
A 529 is what's known as a tax-advantaged account: the interest it earns won't be taxed by the Federal government, and distributions to your children won't be taxed as long as they're for approved educational expenses like tuition and textbooks.
What is an easy, relatively safe choice for stashing retirement funds when you don't know much about investing and don't want to hire a portfolio manager?
Target date funds are a collection of investments managed to meet the needs of a certain age group. For example, a 2050 fund would target people retiring in or around 2050. While there's no guarantee that the stock market is safer than a plank underneath your mattress, the odds are usually in your favor.
What can you do to estimate how much that new car will cost you per month over the next five years?
Say you're eyeing a car that costs $30,000 to drive off the lot. This rule of thumb says that you'd be spending roughly $1,000 on things like the monthly payments, car maintenance and government fees.
What is the "rule of 72"?
If you want a rough estimate of how long it may take for you to double your money in the stock market, take the annual (percent) return you're getting on the investment and divide 72 by that amount. By that rule, if you're getting a 10% return, it should take you around 7.2 years to double your money.
How often should you check on your credit report?
Your credit report could have inaccurate information or show evidence of someone fraudulently using your identity, so it's important to keep tabs on it regularly. Since you can get one free report from each of the three major credit bureaus every year, it's a good idea to check one report every four months.
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