It's Financial Literacy Month: Can you pass the test?

by Center for Personal Finance editors

SILVER SPRING, Md. (4/17/06)--April is Financial Literacy Month--a good time to assess your own financial situation and your financial knowledge. How much do you know? Take this true/false quiz, issued by the National Foundation for Credit Counseling, and find out (NFCC.org April 3).

You have too much debt if you're only able to pay the minimum required on your credit cards. (True or False?) When your paycheck arrives, you should pay rent and other bills first and then see what's left over to put into savings. (True or False?) Spending more than 20% of your take-home pay on credit card bills is a sign that you're in financial trouble. (True or False?) Any time you have a choice between paying two roughly equal debts, you should pay the one with the lower interest rate first. (True or False?) It's important to have an emergency savings fund to cover living expenses for three to six months to protect yourself from an unanticipated event, such as losing a job or a medical emergency. (True or False?)

Answers:

True. When making big purchases, don't use a credit card unless you have a plan in mind to pay off the purchase in three to six months. If you're unable to pay your card balances in full, always try to pay more than the minimum required so you're paying down your principal balance as well as the interest.

False. Every payday, pay yourself first. Treat your savings as another monthly bill. Making savings an unalterable commitment--like rent or the phone bill--will ensure that you build both your emergency savings fund and your retirement nest egg.

True. If you're using plastic to pay for purchases for which you'd normally use cash, and if paying off those purchases is eating up most of your disposable income, then you're probably overextended on your credit cards. Rein in your spending and develop a plan to pay off those balances.

False. The longer you take to pay off the debt and the higher the interest rate, the more that loan actually ends up costing. Save money by paying off debts with the higher interest rates first.

True. An emergency savings plan is like a safety net. Then when you're faced with an emergency, you'll be able to pay for those unexpected expenses without worrying about it or borrowing money.

For more information, read "What's Your Financial Fitness Score?" in the Home & Family Finance Resource Center money savvy section.