Fundamental Finance Academy’s 5-Minute Financial Literacy Test: How Well Do You Know Money?

Think you know your stuff when it comes to money? Whether you think you have a good handle on your financial well-being, or if you have no idea where to start, take our 5-Minute Financial Literacy Test. Answer each question with a simple yes or no. If you answer more than one  “No”, then you might need some additional education. Fundamental Finance Academy offers personal finance counseling to help you navigate the complicated world of personal finance.

Question One: Do you know the difference between a 401K and an IRA?

If you answered “No”, there is a good chance that you images (1)haven’t started planning for your retirement. A 401K and an IRA are both long-term savings plans, complete with tax benefits designed to encourage Americans to save more for their retirement and save them money. The main differences are:

IRA is an acronym that stands for “Individual Retirement Fund” and can be opened by anyone who wants one.

A 401(k) is employer-sponsored only, which means that if you don’t work for a company that offers you a 401(k), you won’t have access to one and may want to open up an IRA.

Question Two: Do you know the difference between compound interest and simple interest?

If you answered “No”, you might be losing money as images (5)we speak! Simple interest is easy enough: Interest is earned on a principal amount. Compound interest often catches people by surprise: Interest is calculated on top of interest, starting with the principal amount and then taking a percentage of the total and adding it to the starting balance. The interest will then be calculated by taking that new sum and then calculating a new figure. If your head is already swimming, you are not alone! Compound interest is a difficult idea for most people.

Question Three: Do you know which method is the best way to pay off a debt: The Snowball Plan or The Avalanche Method? 

If you answered “No”, you might not be paying off images (4)your debt in the best way for your personal situation. The way we pay off our debts can change our relationship with our finances in a huge way. According to The Billfold,

“Snowballing: The snowball method involves making a list of all the balances you owe to various institutions (credit cards, student loans, car loans, etc.) and then tackling your smallest balance first. What you’d do is pay the monthly minimum on all your balances, except your smallest balance, which you’d pay off the most aggressively by applying as much extra money to it as possible. Once you eliminate the smallest balance, you tackle the next smallest balance, and then the next until you’ve paid everything off.”

The Avalanche: This method requires a bit more math. It’s basically the opposite of snowballing, except you’re not paying off your largest balance, but rather your most expensive balance, or the balances with the highest interest rate. Say you have three credit card balances: $500 with an annual percentage rate of 10%, $2,000 with an APR of 20%, and $5,000 with an APR of 15% – in this case, you’d pay off the credit card with an APR of 20% first, because that’s the one that will cost you the most over the long run due to compound interest. Once you eliminate the balance with the highest interest rate, you’d move on to the balance with the next highest interest rate (the $5,000 balance with the 15% APR), until all your balances are paid off.”

Question Four: Do you know what your credit score is?

You probably have been offered a free FICO credit images (3)score at one time or another, but do you know what this information means to you? The number is an important factor when deciding to buy a car or a house and can impact your loan interest rates. A higher credit score means lower interest rates and you appear to be a safer bet to creditors. With a lower credit score, you might appear to be more of a liability to companies and they can increase your interest rates or refuse to service your loans all together. Additionally, your credit score could differ from agency to agency, so make sure to educate yourself about why the numbers vary. Every financial decision you make impacts your credit score, so it is a good idea to get a handle on it before you need to make a big purchase. You can change your credit score for the better in 30 days, but you have to get informed!

Question Five: Do you know how best to pay off your student loan debt?

Congrats on graduating! However, if you answered images (2)“No” to this question, it’s time to learn as student loans are incredibly complicated. Graduates often start repaying their loans before they understand all of the options available to them, often over (or under!) paying. Fight back by educating yourself about student loan repayment plans to protect your future. Learn the difference between forbearance and deferment and arm yourself with the knowledge necessary to decide between the two option, should your situation require big changes.

If you are feel like you need to learn more, contact us here. Fundamental Finance Academy is here to help you navigate the financial waters and get you educated!


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