What’s Your Financial Planning IQ?

Let’s test your knowledge with these questions and also learn about various financial topics.

1. The interest rate on your savings account is 1 percent a year. Inflation is 3 percent a year.
    After one year, would the money in the account buy:

A. MORE than it does today?
B. Exactly the SAME
C. LESS than today?

ANSWER
The answer is C. The reason you have less spending power is inflation. Inflation is the rate at which the price of goods and services rise. If the annual inflation rate is 3 percent but the savings account only earns 1 percent, the cost of goods and services has outpaced the buying power of the money in the savings account that year. Put another way, your buying power has not kept up with inflation.


2. What is a “grace period” on a credit card?

A. The number of days after making a purchase on your credit card before that amount is subject to interest charges.
B. The time during which you pray very hard you will have the money to pay your balance.
C. The length of time between billing due dates on your credit card, during which no interest charges accrue.
D. The time between your credit card due date and the date you are reported late to the three major credit bureaus.

ANSWER
The answer is A. A grace period on a credit card is the number of days you have to make a payment without incurring interest charges. Grace periods generally apply only to new purchases, not to balances carried over from a prior statement period.


3. How often are the three major credit bureaus required to provide you with a free copy of your credit report?

A. Three times per year in total between the three bureaus.
B. Once every 12 months from each of the three bureaus.
C. Once each year from all three bureaus at once.
D. Only when you sign up for a credit monitoring service.

ANSWER
The answer is B. Each of the three major bureaus is required to give you a copy of your report annually. This means they are required to give you a report once a year; you are entitled to a new free report from a bureau when you haven’t gotten one from that bureau in a year. Note that it is a year from when you last received one, it is not once per calendar year.


4. What’s the first step you should take if your identity is stolen?

A. Notify local law enforcement.
B. Place a fraud alert on your credit profile.
C. Notify the postmaster general, as the postal service is responsible for identity protection in the United States.
D. Notify the companies at which you believe your identity or identifying information has been compromised.

ANSWER 
The answer is D. If your identity is stolen, you should immediately notify any institutions at which you believe your information has been used, followed by those where it might be used.


5. If you invest $1,000 at 5 percent interest, compounding annually, after two years you will have:

A. $1,100
B. Slightly more than $1,100
C. $2,000
D. Cannot be determined based on the information provided

ANSWER
The answer is B. If you invest $1,000 at 5 percent interest, compounding annually, after two years you will have slightly more than $1,100. This is due to the compounding effect. After one year, you would have $1,050; your original $1,000 plus $50 of interest earned the first year. But now you have $1,050 to earn 5 percent on during the second year. In addition to the interest on your original investment, you’ll also earn interest on the interest you’ve already received. Your second-year interest will be $52.50: 5 percent of $1,050. Your total at the end of the second year becomes $1,102.50, slightly more than $1,100.


6. Tracy begins contributing $2,000 per year into her retirement plan at age 22. Dave begins contributing $2,000 per year into his retirement plan at age 30. Both gain an average of 8 percent per year on their accounts. At age 65:

A. They will each have the same amount in their retirement accounts because they received the same percentage returns.
B. They will most likely run out of money at the same time because women live longer than men.
C. Tracy will have over 50 percent more money in her retirement account.
D. Dave has plenty of time to catch up; it’s only eight years.

ANSWER
The answer is C. Tracy will have over 50 percent more money than Dave in her retirement account at age 65. This question illustrates the time value of money. Tracy begins only eight years sooner yet ends up with over 50 percent more.


7. If a company files for bankruptcy, which of the following securities is most at risk of becoming virtually worthless?

A. The company’s preferred stock
B. The company’s common stock
C.The company’s bonds
D. Don’t know

ANSWER
The answer is B. Among those with claims to a bankrupt company’s assets, shareholders of common stock have the last claim on any assets, falling in line behind secured creditors, bondholders, and owners of preferred shares. Common shareholders may not receive anything if the secured and unsecured creditors’ claims are not fully repaid.


8. Over the last 20 Years in the U.S., the best average returns have been generated by:

A. Stocks
B. Bonds
C. CDs
D. Money Market Accounts

ANSWER
The answer is A. According to historical data, a portfolio of stocks generated an average annual return over the past 20 years, 2002-2022, that outpaced all other investment categories on the list. Stocks’ performance edge has come with more uncertainty and some dramatic ups and downs along the way.


9. If you buy a company’s stock:

A. You own a part of the company.
B. You have lent money to the company.
C. You are liable for the company’s debts.
D. The company will return your original investment to you with interest.

ANSWER
The answer is A. Stocks are known as “equities” because each stock share represents a small percentage of ownership in the company, usually entitling the shareholder to vote in the election of directors and on other matters taken up at shareholder meetings or by proxy.


10. If you buy a company’s bond:

A. You own a part of the company.
B. You have lent money to the company.
C. You are liable for the company’s debts.
D. You can vote on shareholder resolutions.

ANSWER
The answer is B. Bonds are loans that investors make to a corporation or a government body in exchange for regular interest payments and the return of principal at a future date. Companies issue corporate bonds to raise money for capital expenditures, operations, and acquisitions. But unlike stockholders, bondholders don’t receive ownership rights in the corporation.

Filed under: Dollars & Sense, Life, News
Profile photo of Penny Wasem, CPA, CFP, PFS, owner of Lifetime Financial Planning Solutions in Lancaster, Ohio.

By Penny Wasem, CPA, CFP, PFS

Penny L. Wasem is the owner of Lifetime Financial Planning Solutions, LLC. A summa cum laude graduate of Ohio University, Penny earned a Bachelor of Business Administration with focus in accounting and mathematics. She serves on the board of The Fairfield Medical Center Foundation, is a member of the Investment Committee of The Fairfield County Foundation and has been active on many non-profit boards in the community. Penny lives in Lancaster with her husband Eric Hubbard and is parent to Clark and Olivia Hubbard.