There are several benefits to taking a financial literacy quiz. Essential topics ranging from mortgages to inflation are not covered often enough within the traditional education system. And even if you are a financial whiz, there is likely more you have to learn. Our financial literacy quiz is an excellent way to identify gaps in your knowledge and may even put some new concepts on your radar.
Knowing Your Credit Score
Your credit score is calculated based on information in your credit history. Depending on the scoring model, you can have more than one credit score. While FICO 8 is the most commonly used by lenders to judge your fiscal health, some mortgage lenders might use FICO Score 2, 4, or 5. Monitoring your credit score(s) is important, as it can impact your eligibility for loans, car leases, and housing.
There are several ways to check your credit score. Many major credit card companies provide credit scores for their customers; they could be listed on your monthly statement or found by logging into your online account. Additionally, several financial services monitor your spending and credit and can provide you with a score. The U.S. Department of Justice maintains a list of approved non-profit credit counselors, while the U.S. Department of Housing and Urban Development offers the same for HUD-approved housing counselors. These counselors can often provide you with a free credit report and help you review them.
Important
You are entitled to free copies of your credit reports from all three major bureaus at least once a year. You can request them at the official website for that purpose: AnnualCreditReport.com. If you find any errors, you have a right to challenge them, and the credit bureau is required to investigate.
What Is a 401(K)?
A 401(k) is a retirement savings plan offered to many U.S. employees The person who enrolls in a 401(k) plan agrees to have a percentage of each paycheck paid directly into an investment account. Sometimes, the employer may match part of that contribution, typically pre-tax. From there, the employee can choose from some investment options, typically mutual funds. By understanding the different kinds of retirement savings options, you can assess what is the best move for you at this time. Generally, it’s better to begin saving as soon as possible.
Causes of Inflation
Inflation is a rise in prices, which can also be described as the decline of purchasing power over time. If inflation rises too quickly, it can have a negative impact on the overall economy. It can occur in nearly any product or service, especially need-based expenses such as food, housing, medical care, and consumer goods like cosmetics and cars. Once inflation extends to most sectors of an economy, it becomes a concern for both businesses and consumers. The Federal Reserve has an inflation target of approximately 2% and adjusts monetary policy to combat inflation if prices spike too quickly.
By knowing what inflation is and how it snowballs, you can adjust your lifestyle accordingly–limiting expenses, shifting your savings to a high-yield account, or investing.
Stock Market Indexes
There are three major stock indexes for tracking the performance of the U.S. market: the Dow Jones Industrial Average (DJIA), the S&P 500 Index, and the Nasdaq Composite Index. They provide a broad representative portfolio of investment holdings, so people follow different indexes to gauge market movements.
Once you begin to explore and follow these indexes, you’ll have a better idea of what to do with your own investments.
APR
Annual percentage rate, or APR, is the yearly interest rate charged for a loan or earned by an investment. It calculates what percentage of the principal you’ll pay each year by taking things such as monthly payments and fees into account. It is also the annual rate of interest paid on investments without accounting for the compounding of interest within that year.
You’re most likely to come across APR on your credit card. It can either be fixed or variable. A fixed APR loan has an interest rate that is guaranteed to stay the same during the life of the loan, line, or lease. A variable APR, on the other hand, has an interest rate that may change. Rates for people with excellent credit are significantly lower than the rates offered to people with bad credit.
It’s crucial to understand APRs so that you can make safe decisions when borrowing money, whether it’s through a simple credit card or taking out a loan. If you have a variable APR, it’s important to monitor your rate actively and make payments on time, or else a high APR may mean a higher payment that could thrust you into debt if you aren’t ready to pay it.
APY
Annual percentage yield, or APY, is the interest rate earned on an investment in one year, including compound interest. The more often interest is compounded, the higher the APY will be. A higher APY is better because your return will be higher. You can compare APYs at different financial institutions to ensure you open an account with the biggest possible return. Similar to APR, APYs can have either fixed or variable rates. Generally, higher APYs are associated with less liquid accounts.
Mortgages
A mortgage is a loan used to purchase a home, plot of land, or other type of real estate. The home serves as collateral to secure the loan. To get approved for a mortgage loan, you’ll likely need good credit and enough money for a down payment (this is where knowing your credit scores, APRs, and APYs comes in handy).
How To Continue Your Financial Literacy Journey
Our financial literacy quiz is a great step to take to identify and understand what you don’t know and can help guide your continued learning of financial topics.
To those who got perfect scores, congratulations. You’re ready to move forward to more long-term financial education. Since you have a solid understanding of personal finance, now is a great time to begin educating yourself on retirement planning and wealth-building topics. With your present financial situation under control, learning more about your options for the future will allow you to live comfortably later in life, too.
For those who got passing scores, you’re on the right track. We recommend looking into debt management and investing to ensure you’re making responsible financial decisions. You seem to have some money put away or have begun building credit. Now, you can focus on staying on top of monthly payments and saving.
For those who still have room for improvement, don’t worry. Start with the basics: open a bank account and track your monthly spending. From there, you can begin budgeting and saving.
What Are the Benefits of Taking a Financial Literacy Quiz?
Our financial literacy quiz is a great way to identify benchmarks in your personal finance journey. Maybe you know more than you realize, or maybe you’ll learn that you’ve misunderstood a concept. They are designed to help identify gaps in your understanding so that you know how to move forward or what to prioritize in your personal finance journey.
How Can I Prepare Effectively for a Financial Literacy Quiz?
You don’t need to prepare for a financial literacy quiz. They are used mainly to help you reflect on your own financial journey, so studying for them would produce an inaccurate representation of your experience. Answer the questions to the best of your ability with the knowledge you already have, and from there, you can identify topics to continue learning about.
What Resources Can Help Me Improve My Financial Literacy Knowledge?
Investopedia has educational information to answer any of your financial questions, covering anything from mortgages and airline points to broader economic theories.
The Bottom Line
It’s important to know your level of financial literacy. Navigating the world of personal finance is a tricky undertaking, but by eliminating topics you already have a good grasp of, you can identify the areas that require more attention. Sometimes, the mere scope of one’s understanding can change by taking this quiz, and others like it, as they can expose you to new topics.
When it comes to financial literacy and preparedness, it’s called a journey for a reason. People who walk away with both low or perfect scores will still have something new on their radar to learn about. Focus on one step at a time.
Read the original article on Investopedia.