The Bad Money Advice Financial Literacy Quiz

This is, as you undoubtedly know, Financial Literacy Month. (It is also, apparently, National Anxiety Month and International Guitar Month.) So to celebrate, I have prepared the following personal finance literacy quiz. And who doesn’t like quizzes?

I expect this to be relatively hard for most folks, although every question involves issues that an ordinary person might encounter in their financial lives.

I’m a little uncertain about the technology here, so if there are bugs, I apologize. Also, I assume that it will not work with RSS readers. Sorry.

The Financial Literacy Quiz

Musings, The Big Picture | Frank Curmudgeon | April 17, 2009 12:00 pm

No Comments

By ObliviousInvestor, April 17, 2009 @ 12:58 pm

Great quiz! I got 17/20

I missed:
The one about points–not surprising, having not bought a house yet,
The 2nd-to-last one (about Monica retiring to Florida), and
The one about FDIC insurance. (No good reason here, just temporary brain failure.)
By Baker @ ManVsDebt, April 17, 2009 @ 1:21 pm

To which loan should Henry apply the $2500, assuming he wishes to maximize his net worth?

* All these options have no net effect on his net worth.

As of April 2009, FDIC insurance on bank deposits covers:

Deposits in checking and savings accounts up to $250,000, but not CDs
Deposits in checking and savings accounts up to $250,000, but not CDs

Options one and two are both the same!

Frank, really enjoyed this quiz… Nice job
By Matthew S, April 17, 2009 @ 1:50 pm

I believe that the law still says you are legally liable for $50 of fraudulent charges if your credit card is used to make unauthorized charges. However, credit card policy now states they won’t hold you liable. So, you are still liable for it, they are just forgiving that $50.
By SJ, April 17, 2009 @ 2:14 pm

HAHAHA i bombed it =)

I blame the fact I don’t care about certain things (mortgages,estate)
But still terrible score =)

I also thought you had to report a CC stolen to be protected… cool sutff =)

Nice to see how much more I have to learn!
By Frank Curmudgeon, April 17, 2009 @ 2:45 pm

Baker: I meant long-term net worth. I will edit the question for clarity. And fix the answers for the FDIC question. Thanks.
Matthew S: If Visa tells me I am not liable for anything, then I think they are legally bound by that promise and I am therefore not legally liable.
SJ: I suppose you do have to report a CC stolen at some point. I wonder what would happen if you waited, say, two or three years….
By Steve, April 17, 2009 @ 3:45 pm

I chose one of the duplicate options for the FDIC question, and the total was correct but the individual question showed me as answering correctly (when I obviously did not.) I was thrown off by the mispelling of “baring.” Thanks for posting a quiz which was at least a little challenging.
By ryan, April 17, 2009 @ 4:10 pm

I shouldn’t have gotten the first one wrong about house down payment savings–in reality, we did money market and CD’s for our down payment savings, but I was thinking that answer was too easy.

I didn’t know how to calculate the benefits for paying points.

I had no idea that’s what IRA stood for.

I didn’t realize margin interest was tax deductible. Is this pretty common for [affluent] people to do?

I didn’t know a broker would finance ETF purchases, but I suppose I shouldn’t be surprised.

When reading the last question, I glossed over the word “paper” and guessed “Grant.”

Anyway, as a side note, the question about Geraldine’s tax free home appreciation is fine, but the answer’s explanation states that $500k is tax exempt. Isn’t that only for couples? If it’s only Geraldine, I think that would just be $250k.
By Four Pillars, April 17, 2009 @ 4:13 pm

I got 15/20. Boo for making me think on a Friday afternoon!

I can’t believe the IRA one…
By Frank Curmudgeon, April 17, 2009 @ 5:56 pm

Ryan: The points thing in the explanation is just a rough approximation you can do in your head. A better (but still not air-tight) way is described in my Bloggers and Mortgage Interest post.

Margin interest is tax deductible, as is interest on any loan you take out to finance an investment. I’ve no idea how common it is. Financing ETF purchases is, of course, an example of using margin.

Good catch on Geraldine’s tax exemption. I will edit the explanation accordingly.
By Mark Wolfinger, April 17, 2009 @ 10:16 pm

Why have a quiz with incorrect answers?

The penultimate question. The correct answer is to finance 100% of the house. If property values decline, she can do the unethical, but financially correct move, and walk away from the house. That provides zero exposure. Cannot have less than that.
By ryan, April 17, 2009 @ 11:11 pm

Here’s an appropriate question:

The interest due on your mortgage each month is determined by what two variables?

a. remaining principle and interest rate
b. interest rate and amortization schedule
c. interest rate and loan term
d. number of years the loan has been serviced and loan term

Obviously “A” but I find people get so wrapped up in trying to understand this, 15 year vs. 30 year; how much will I save with a 15 year? Or they say “with a 30 year you’re paying so little principle at the beginning.” Very few people, writers included, seem to really grasp what prepayment actually does for them; they’ll know they’ll pay it off early, but they don’t really know why. And most people have no idea that a 15 year and a 30 year at the same rate can both be paid off in 15 years for the exact same amount of money each month.
By TJR, April 17, 2009 @ 11:48 pm

Here in Germany, most credit card agreements require you to pay for misuse before you reported it stolen, capped at 100EUR, but not for abuse after that. And you have to report it stolen both to the bank and the police as soon as you reasonably can, else you lose this protection entirely.

Side note: I got all of the US tax questions wrong. Wonder how come …
By DR, April 18, 2009 @ 6:41 am

Great quiz! The question about Fred’s Roth IRA and a taxable account is an interesting one. While the traditional view is to put bonds in the retirement account because they throw off taxable income each year, I’m not sure that’s the best option here. Since the Roth is tax free, and it is a reasonable assumption that the stock fund will, over time, grow much larger than Treasury Bonds, by putting stocks in the Roth, you shield more assets from the tax man in the long run.
By Frank Curmudgeon, April 18, 2009 @ 8:37 am

Mark: As I was writing that question the walk-away argument occurred to me, but I decided to let it be. Homeowners don’t have a right to walk away. If you borrow money on a mortgage you owe it, not the house, and a bank can sue you for it. As a practical matter, they rarely do, because the homeowner is generally broke. But in this case Monica apparently has the cash. Still, you have my permission to increase your score by a point.

TJR: Sorry to be so US-centric. So much of the hard parts of personal finance have to do with our tax laws and other regulations that I’m surprised anybody from Canada ever reads this, never mind Germany.

DR: Taken to extremes, I think you have a point, e.g if the stock side grew to twice the size of the bonds. I guess I was implicitly assuming that Fred would from time to time rebalance, i.e. that as the stocks outpaced the bonds he would sell some and buy bonds to keep at 50/50. Indeed, as he gets older he might want to skew more in favor of bonds anyway.
By the weakonomist, April 20, 2009 @ 9:55 pm

Frank, you got me with the dollar bills. I thought FDR was on the $100k, it’s Wilson instead. Good quiz. Of note, I keep a $2 bill in my wallet so was able to cheat there.
By Roger, April 28, 2009 @ 8:13 pm

Dang, I ended up with a 13 out of 20. Some stupid mistakes, some questions I didn’t read carefully enough, and some things I just didn’t know (federal tax deductions, for example). Oh well, at least I learned some new information.
By maxwellthedog, May 1, 2009 @ 2:49 pm

Frank– nice quiz, though i have to quibble with one point. When you talk about minimizing her “exposure” in the question about Florida real estate, there is another way to interpret it. When i read the question, i immediately thoguht of exposure as “precentage of net worth allocated to this asset”. If you think of someone’s assets and liabilities as a balance sheet, then borrowing as much against the house will reduce her exposure. For example, if she has $1M and decides to pay cash, then she is 25% exposed to FL real estate. But if she mortgages 100% and keeps her $1M in other investments, then she is only 20% exposed to real estate. Of course, she is also levered.

If she loses money on the house, she loses the same dollar amount either way. But if she took on the mortgage and actually earned a positive return with the rest of her portfolio (net of carry cost on the mortgage), then she will come out ahead.

I know it is a minor point, but when i hear the word “exposure” i think asset allocation. And economically, levering up across uncorrelated assets can help to reduce risk.
By Frank Curmudgeon, May 1, 2009 @ 4:34 pm

Not to get tied up with semantics, I think it makes more sense to think of risk exposure for a person in terms of dollars at risk rather than in terms of a percentage of a (possibly levered) portfolio. For example, if a person owns a house worth $1M and has no other assets or debts, and if they borrow $500,000 and put that money in the bank, I don’t think that they have reduced the risk that they are taking in any meaningful sense, although the house is now only 66% of their less risky asset portfolio.
By kurt, May 11, 2009 @ 11:01 am

“Interest paid on a loan that finances a stock purchase (margin interest)”

I was unaware (and missed this one, picked dry cleaning even though I suspected that was wrong too) this is tax deductible. A quick search on the web explains it, but I can’t figure out what the intent of that tax law is. Mortgage interest, student loan interest, well that’s pretty obvious. Are the Feds trying to tell us that we should go out and buy stocks on margin? Or is there something obvious I’m not considering?
By Frank Curmudgeon, May 11, 2009 @ 2:21 pm

The appealling answer is that margin interest is akin to a business cost. In general, expenses you incur to make money are deductible against that income.

The cynical answer (which always works better for me) requires a bit of history. In the good old days, all interest was deductible. When they reformed the tax code in the 1980′s they wanted to do away with that but realized that they had to make two exceptions: the mortgage interest deduction, because if they nixed it the housing market would collapse overnight, and the margin interest deduction, because the same thing would have happened to the stock market.