One company recently tested 16-year olds on their knowledge of personal finance with some everyday questions about savings, tax, currency exchange and utilities. Almost a third of those tested scored 43% or less in this test.
Test yourself
Here are the seven questions that were asked. See how many you can answer correctly (answers at the end of this article).
1. Kat paid $5,000 for a car in April 2009. In the first year, the value of the car depreciated by 10%. In the second year, the value of the car depreciated by 15%. How much can Kat sell the car for in 2011?
2. Bob is paid $37,465 a year. His personal tax exemption is $6,000 for the year. If Bob’s income is taxed at 22%, how much income tax does he pay in a year?
3. Leonie has $2500 to invest for four years and can choose between two different savings accounts. Account One pays 3.7% simple interest paid out at the end of each year. Account Two pays 3.4% compound interest paid at the end of each period (year). Which account would give Leonie more interest over the four-year period?
4. Jenny wants to buy a new TV but is $300 short. She sees an advertisement for a loan offering $300 for eight months with a monthly repayment of $50. If she takes the loan, how much extra will she have to pay?
5. Andrew pays his electricity bill monthly. His current charge is $0.046040 per kWh. Last month he consumed 1201 kWh. If next month he reduces his electricity usage to 1100 kWh, how much money will he save?
6. Rachel is going on vacation in Spain and needs to change $300 into euros. The change kiosk in the airport charges 0.6% or $6.73 to change money whichever is the greater. How much will changing her money at the airport cost Rachel?
7. Sophie was left $6,000 by her grandfather and decides to invest the money for two years. Her bank offers her a choice of two savings accounts. Account One pays 3.1% on a monthly basis. Account Two pays 3.25% annually. Which account will give a higher closing balance with no withdrawals?
Understanding personal finance is critical
You’ll see in a few moments as to whether you’re smarter than a 16-year old about personal finance. I certainly didn’t know much about personal finance when I graduated from college and got married. I had worked fairly constantly since I turned 16 and about all I knew was that you should spend less than you earned. Of course, when I was in college I didn’t always follow that dictate. There were many times when I ran out of money before I ran out of month. I did finally learn the importance of spending less than I earned but it took several years for me to learn some of the important basics of personal finance.
1. Learn your spending patterns
The first step in becoming good at personal finance is to determine how you spend your money. I learned that the only effective way to do this was to track our spending for at least four weeks. This meant keeping track of not just the big stuff like rent and groceries but also the very small stuff right down to a candy bar I had at work. I did this the old school way with a notebook and a pencil. Today, thanks to all of the smart phone apps available, this is much easier. For example, if you were to choose Mint.com it would not only track your spending for you but also categorize it so that you would be able to see exactly what you spent in areas such as groceries, dining out, utilities, clothing, hobbies, transportation, healthcare and so forth.
2. Compare this with your income
Once you see what you spent in the past month you need to compare this with how much you earned. When you do this you might be in for either a shock or pleasant surprise. The pleasant surprise would be if you spent less than you earned and had extra money to save or invest. The shock would be if you find that you spent more than you earned. If this is the case, you will need to review all of your spending categories with an eye towards determining where you could make cuts. As a rule, most people find the easiest places to reduce their spending are groceries, clothing, entertainment and dining out.
3. Save more by creating goals
Most people find that it’s tough to save money just for the sake of saving money. What’s better is to create one short- and several long-term goals. As an example of this, your short-term goal might be to take a nice vacation to Florida next spring while your long-term goals might be to buy a new car or to save enough for a down payment on a house. Whatever goals you create, you might spreadsheet them so that you will be able to see the progress you’re making towards realizing them. This can be a great incentive to stay on track in your saving.
4. Read books about personal finance
Assuming that you don’t have a financial mentor, the best way to get a better understanding of personal finance is to read some books. We like The Money Book For The Young, Fabulous And Broke by Suzy Orman; the classic Think and Grow Rich, by Napolean Hill; Get Rich Carefully, by Jim Cramer; Rich Dad, Poor Dad, by Robert Kiyosaki; and today’s best-selling book on personal finance (according to Amazon), The Total Money Makeover, by Dave Ramsey.
5. Get a mentor
The best way to learn about personal finance is to get a mentor – someone who has been there and has learned how to manage, save and invest money. If you’re fortunate, this person could be your father, an uncle or a cousin. Barring this, you’ll just need to be on the lookout for someone who is a successful money manager, who is well to do and would be willing to mentor you. Just make sure that you don’t come off as too “needy.” In other words, don’t pester that person with several financial questions every day. When you have a question about personal finance, write it down and start a list. Once you have a half dozen or more questions, you could then ask that person to sit with you for a half an hour or an hour to answer them. But try to not do that more than maybe once a month.
The answers to our seven questions
If you’ve been chomping at the bit to see whether or not you’re smarter about personal finance than a 16-year-old, here are the answers to the seven questions we posed at the beginning of this article.
1. $3825
2. $6,922
3. Account #2
4. $100
5. $4.65
6. $18
7. Account #1
So how did you do?
If you were able to answer all seven of these questions correctly, give yourself a big gold star. And congratulations! You’re officially smarter about personal finance than the 16-year-olds who were tested on these questions. On the other hand, if you were able to correctly answer only two or three of them, you need to get to work and read some of the books about personal finance that we listed above. Think of it this way. It might take you several weeks to read one of those books but it could make the rest of your life a lot better. If your personal finances are not currently under control, this would help you better manage them. You would be saving money each month towards your important goals. And it’s likely that this would take much of the stress out of your life.