March 17, 2014

Quiz: What You Don’t Know Could Cost You

[For the official COUNTRY Financial Security Index release, click here]

The results are in! This month, we tested Americans’ personal finance knowledge and found they need to spend more time studying if they want to earn a passing grade.

See how your personal finance knowledge stacks up, take our personal finance 101 quiz below:


If you did well on the quiz, nice job! If you didn’t fare so well,  don’t worry – below are some simple tips that can help you get on track.

Q: What is the recommended percentage of income you should spend on housing?

A:  30 percent. Many financial planners and experts stick to approximately this amount so you don’t overextend and end up “house rich and cash poor.” Keep in mind, that 30 percent should include principal, interest, home insurance and property taxes. Just one in three (31 percent) Americans answered correctly; leaving 69 percent unaware of how much housing costs today and the impact it has on the ability to build a solid financial future.

Tip:  It’s never too late to equip yourself with information or to talk to a professional. It’s important to start with what’s probably your largest expense, your housing, to make sure you’re not buying “too much” house. If you max out your income on your home, you may not have enough left over for personal savings and retirement funding.

Q: How many month’s salary should be in emergency savings?

A: 4-6 months. Just 40 percent answered this correctly.

Tip: Most planners advise having at least a 4-6 month cushion. If your income can vary considerably, such as result of commission or bonus structures, or you work in a volatile industry, you might consider a bigger cushion.

Q: If you save 10 percent of your income annually, will you have enough money to retire and live the way you are accustomed?

A: Probably not. Nearly half of Americans may not be on track to retire comfortably, as 44 percent either agree or are unsure if saving 10 percent of their income annually is enough. And men (30 percent) are even more likely to say yes than women (18 percent). Perhaps because of this, they are putting their money elsewhere or aren’t aware of the appropriate vehicles for the best return on investment.

Tip: A sound retirement plan is one set up like a three-legged stool, drawing on personal savings, employer contributions in a pension or 401(k) and Social Security. While people with a very generous employer program and modest lifestyle may only need to save 10 percent of their income, this is probably not the case for most Americans.

Q: Which is more important to save for: college or retirement?

A: Retirement. Forty-three percent of the general population say saving for their child’s college education is more important than saving for their own retirement, and another 11 percent are unsure. Lower income groups are even more likely to say saving for their child’s education is more important.

Tip: You can borrow for college, but not for your retirement. As a rule of thumb, retirement savings should come first, however we often see Americans putting the priority on education expenses.

Q: Which of these describes a Roth IRA: taxed while saving and tax-free on withdrawal, or tax-free while saving and taxed on withdrawal?

A: Taxed while saving and tax-free on withdrawal. Just 38 percent of Americans answered this correctly. Thirty-two percent chose incorrectly and another 30 percent were just altogether unsure. Tax-free while saving and taxed on withdrawal describes a Traditional IRA.

Tip: Roth IRAs can be a great addition to traditional retirement plans, such as 401(k)s.  While you give up the income tax break on the front-end, withdrawals at retirement can be tax-free.  That can be important and allow you diversify your retirement assets from an income-tax perspective.

Q: Is it better to get a large tax refund or have fewer taxes withheld from your paycheck throughout the year?

A: It’s better to have fewer taxes withheld. While a majority (59 percent) of Americans say having fewer taxes withheld is the better choice to make more money in the long-term, there are still a significant number who don’t. Even fewer Gen Y Americans (46 percent) say the same. Perhaps this is why 26 percent said the appropriate amount for emergency savings is much less than recommended (four to six months) or were unsure.

Tip: While getting a big refund check can feel great, this can be an expensive way to save – think about the lost interest throughout the year as well as what you could have done with extra money on each paycheck.

Tell us how you scored and see more ways to increase your financial security.


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