Test Your Money Knowledge

Take our quick Money Quiz below to test your money knowledge. Answer each question by thinking "Always", "Sometimes", or "Never". Find our opinions by clicking the appropriate question. Remember, this quiz is meant only to stimulate your thinking and should not be used for making financial decisions without appropriate review of your situation and professional advice.

Test Your Money Knowledge

How soon to pay off your home is a personal decision that fits into your overall financial picture. However, you may want to consider giving yourself the most financial flexibility when choosing a pay off option. For example, a 15-year amortization schedule locks you into a higher monthly payment each month. A semi-monthly payment schedule could do the same. A longer term loan, such as a 30-year amortization, commits you to lower monthly payments than a 15-year amortization. You then have the flexibility to either invest/save the payment difference, or to pay extra principle payment whenever you have additional cash available. These options could enable you to pay off your home in 15 years without having a commitment to higher monthly payments. You may also save additional income taxes with a longer term loan, and those savings could be directed to paying down principal.

When and how much to contribute to a 401(k) plan should be part of an overall financial strategy. Contributing the maximum could be a good idea if all other issues in your financial house are in order. However, if contributing to a 401(k) creates other financial problems or stress, then perhaps your 401(k) contributions should be a lower priority. For example, if you have financial obligations such as high credit card debt, education loans or are saving for college expenses delaying 401(k) contributions until those obligations are met could be a strategy for you to consider. Also, you should consider the match that your company provides. Your best returns can be achieved when you contribute to obtain the maximum company match. If you are contributing monies that are not matched, then you could consider evaluating other alternative uses for the monies that are not matched.

401(k) loans have their place, but you need to understand their limitations and potential drawbacks. First, they are generally limited to $50,000 and must be paid back within 5 years. So, this may not be the place to go if you need a long term loan.

Secondly, most people do not realize that if they leave their employer, they are required to pay back the 401(k) loan within a specified period of time - generally 60 days. If the loan is not paid back within the specified time, the IRS considers the loan income and a premature withdrawal (assuming you are under age 59 1/2) to be taxable. Thus, you may be taxed on the amount you borrowed and charged a 10% early withdrawal penalty.

Many people argue that 401(k) loans are good because you pay yourself back and you pay yourself interest. It is true that you pay yourself interest, but you have to understand the following: When you pay the principal and interest, you are paying in after tax dollars (remember, your contribution to the plan was in pre-tax dollars). So, if you are in a 25% tax bracket, you must earn about $67,000 to pay back a $50,000 loan. In essence, you just lost your tax deduction. On top of that, the interest you pay to yourself comes back to you as income during retirement and is taxed at that time. So, you wind up paying double tax on the interest.

The bottom line is that 401(k) loans can be useful if you use them appropriately, but you must understand the pitfalls to avoid major costs.

Using your home equity line can be a good alternative to financing a car purchase. The interest rate could be lower than other car loans, and the interest might be tax deductible. Also, using your home equity line will most likely result in lower required monthly payments. However, your goal should be to pay back your home equity line in the same period of time as you would have paid off a standard car loan. The advantage of the lower required monthly payments is that you can pay less if you run into a period of financial difficulty. You should always evaluate all your financing options whenever you make a car purchase.

Contrary to popular belief, term insurance can be the most expensive form of life insurance. Think of it this way - buying term insurance is like renting an apartment. In both cases, the money goes to someone else and you have no asset to show for your expenses. The cost of term insurance is not only the cost of the monthly premium, but the lost opportunity cost on that premium as well. For example, a $50 per month premium paid for 20 years results in a cost of $12,000. But the lost opportunity cost (your inability to invest the money elsewhere) adds another $17,541 (using an 8% compounded rate of return). So, in this example the total cost of owning a term life insurance policy for 20 years is $29,451. Permanent life insurance can be designed to provide the life insurance protection you need now and the ability to recover the costs of the insurance later for uses such as college tuition, retirement income or estate preservation. Thus, long term permanent life insurance can be more cost effective than term insurance when the plan is properly designed.

An often overlooked financial product that can provide tax free income is permanent life insurance. In a properly designed plan permanent life insurance can be used to grow cash values that are tax deferred. Those cash values can be accessed later, tax free, using a number of strategies. Bonds can provide tax free income, but permanent life insurance can provide both tax free income and protection in the event of disability or premature death.

a) Many people perceive their home as an asset. However, Money Counts would argue that an asset should be able to produce income for you. Your home generally does not produce income but, in fact, has many operating expenses, such as taxes, utilities and more.

b) If your home might not be an asset, then your car might certainly not be an asset. Not only does it have significant operating expenses, but it is rapidly depreciating as well.

c) Your 401(k) is an asset. It has real value and may be producing income. If you are not retired that income is generally reinvested for growth. You really cannot tap into that asset until you retire - at least not without penalties. If you are retired you may be using your prior 401(k) for income. Remember, 401(k) assets, as well as some other retirement plan assets such as IRAs, have a liability attached to them: the income taxes due upon withdrawal. Make sure you always mentally adjust the value of such assets to account for the taxes you will pay.

d) Rental real estate can be an asset. However, it may be an asset only if it is producing positive cash flow for you. If it is costing you money to own it, then rental real estate may not be an asset.

The best time to consult with a financial advisor is any time you are ready to begin your long-term strategy. Starting your planning early, even if you have few or no assets, may give you better direction and possibly help you avoid mistakes that could be costly in the long term.

The above examples are hypothetical and do not necessarily represent actual return figures.  Past performance is no guarantee of future results