According to a recent survey by Standard and Poors, only 57% of US adults are financially literate. Drilling further into the numbers, only 45% of women are financially literate compared to 55% of men who are financially literate. We decided to create our own questions and share them with you.
1. What is compounding interest?
a. Compounding interest is the interest you earn on interest.
b. Compounding interest is calculated using the Fed Fund’s rate.
c. Compounding interest is doubling down on the current interest rate.
2. What is cash flow?
a. Cash flow is the concept behind managing expenses. It is the inflow and outflow of money in a household or a business.
b. Funds that are spent on expenses.
c. Paycheck income.
3. How does one calculate their net worth?
a. Retirement assets minus long term debt.
b. Assets minus liabilities equals net worth.
c. Checking & savings minus credit card debt.
4. Social Security uses the acronym FRA which means?
a. FRA is full retirement age.
b. FRA is full retirement annuity.
c. FRA is financial retirement annuity.
5. What is asset allocation?
a. Asset allocation is the process of dividing assets among children.
b. Asset allocation refers to an investment strategy in which individuals divide their investment portfolios between different diverse asset classes to minimize investment risks.
6. What is the difference between your effective tax rate and marginal tax rate?
a. The marginal tax rate is the average tax rate you pay on your household income. The effective rate is the highest rate calculated on your income.
b. The marginal and effective rates are the same.
c. Your effective tax rate is the average tax rate you pay on your household income; it is a blended rate of all the tax brackets that apply to your situation. The marginal tax rate is the highest bracket your last dollar of taxable income falls into.
1. A. If you are in saving mode, it is an excellent strategy as evidenced by any compounding interest calculator. However, if you are a borrower, it is NOT a good strategy. Think about credit card debt compounding at a rate of 26-26%. It can be catastrophic.
2. A. Knowing how much is coming in the door is key to knowing how much you can spend. Spending more than is coming in is not sustainable for most people or businesses.
Cash flow will also help determine how much can be deposited into a 401K or IRA, how much one can afford to borrow, and whether a payment (mortgage, car loan) is affordable.
3. B. Net worth is sometimes referred to as a balance sheet.
4. A. Full retirement age. You can begin receiving retirement benefits at age 62, but your payments will be greater if you wait until your full retirement age (currently between 66 & 67, depending on your year of birth).
5. B. Asset classes fall into three broad categories, equities, fixed-income, and cash and equivalents. Anything outside these three categories (e.g., real estate, commodities, art, hedge funds) is referred to as alternative assets.
6. C. The effective rate is always lower than the marginal rate.
If you would like more information, please contact us at Jenifer@mosaicfi.com