Are you financially savvy?

Here are four scenarios.

Mary's situation

Suppose Mary graduates from college at age 22, saves $2000 per year in a Roth IRA for the next five years, and then stops adding any contributions. At age 62, what value will her IRA have, assuming 10% return (compounded monthly while contributing and quarterly thereafter).

John's situation

On the other hand, John also graduates at age 22 and waits until he is 32 to start his Roth IRA (focusing on a new car, home, and so on). Then he contributes $2000 per year in the same fund as Mary for the next 30 years. Whose IRA is worth more when they are both 62?

Buying a car

Suppose that in 10 years I wish to buy a new (new to me -- it may actually be used) car. I plan to pay with cash since I don't borrow for depreciating items. Suppose that I am planning on paying $20,000 on this car. How much per month should I put aside for the next 10 years? Assume that the interest rate will be at 6% (since in a bond fund -- why here?).

college education from inheritance

Suppose that my college-age daughter receives an inheritance of $25,000. How much of this do I need to set aside in an account that pays 6% per year so that she can withdraw $500 per month for four years?

What is Your Financial IQ?

[From Des Moines Register, November 1, 1999] Answer these 20 questions

Part I -- Items of Interest

1. You put $1000 into a savings account for a year and earn 3 percent interest on it. If you are in the 31 percent tax bracket, and inflaction is running about 2 percent over the time period, at the end of the year your purchasing power has:
   1. Increased 2 percent
   2. Increased 1 percent
   3. Stayed about even
   4. Decreased 1 percent
   5. Decreased 2 percent
2. In the above example, if interest is paid monthly, the dollar amount of your account after one year will have increased
   1. A little more than 3 percent
   2. A little less than 3 percent
   3. 3 percent
   4. Varies, depending on inflation
3. At the begnning of year 2000, Louie puts $10,000 into a retirement investment that pays 10 percent once a year at the end of the year. He never adds any more money, and the rate of return never changes. Huey waits until the beginning of year 2001 to make a one-time contribution of $10,000 to the same kind of account. At the begnining of 2020, Huey obviously will have less money in his account than Louie. How much less?
   1. $1000
   2. About $2,500
   3. About $4,000
   4. About $6,000

Part II -- Taking Stocks

4. Your cost basis in a stock is:
   1. The original dollar amount you paid per share.
   2. The dollar amount you paid per share, adjusted for splits.
   3. The dollar amount you paid per share, adjusted for splits, less cash dividends paid per share over your period of ownership
5. Price-earnings (P/E) ration is (pick two):
   1. Stock price per share times annual earnings per share.
   2. Stock price per share divided by annual earnings per share.
   3. A starting point for determining whether a stock is fairly valued.
   4. A poor indicator of whether a stock is fairly valued.
6. An index fund often has lower fees than other types of mutual funds because:
   1. Index funds are widely available and competitively priced
   2. Management costs are lower for an index fund.
   3. Returns are typically lower than for actively managed portfolios.
7. When a stock you own splits two for one, you then own:
   1. Twice as many shares as before.
   2. Half as many shares as before.
   3. The same number of share, but each is worth twice as much as it was before.

Part III -- Taxes: Sure as death

8. Which of the following is/are tax deductible:
   1. Contributions to an individual retirement account (IRA)
   2. Contributions to a Roth IRA
9. Which of the following is/are not taxable on your federal income return:
   1. Municipal bond income
   2. U.S. Treasury bond income
   3. Corporate bond income
10. Which of the following may reduce your income taxes even if you don't itemize deductions:
    1. Payment of student loan interest
    2. Hope and Lifetime education credits
    3. Out-of-pocket expense for health insurance premiums
    4. Contributions to College Savings Iowa acount

Part IV -- Read it in the paper

11. When inflation is on the upswing, the Federal Reserve is likely to
    1. Raise interest rates
    2. Lower interest rates
    3. Let the money supply and borrower demand govern interest rates
12. Which describes a decline in the prices of goods and services?
    1. Recession
    2. Inflation
    3. Deflation
    4. Disinflation

Part V -- Minding your money

13. As a way of paying a bill, a debit card is most like
    1. Cash
    2. Check
    3. Credit card
14. You charge $5,000 on your credit card, which has an annual interest rate of 17 percent. The minimum monthly payment is 2 percent, and you never pay more. How long will it take you to pay off the balance, and how much interest will you have paid?
    1. 8.5 years and $2,095
    2. 18 years and $4,296
    3. 24 years and $6,210
    4. 40 years and $11, 304
15. The main difference between a bank and a credit union is:
    1. The credit union is a not-for-profit operation.
    2. The credit union is smaller.
    3. The bank pays higher interest.
    4. The credit union pays higher interest
16. Which of the following is not insured by the Federal Deposit Insurance Corporation (FDIC):
    1. Checking account funds
    2. Savings account funds
    3. Certificate of deposits
    4. Money market funds

Part VI -- Incubating a nest egg

17. Who can contribute to an IRA:
    1. Anyone age 18 or older who has earned income.
    2. Anyone under age 70 1/2 who has earned income.
    3. Persons whose earned income is within income guidelines.
18. How many of the following are true about a Roth IRA:
    1. Anyone with earned income can set one up.
    2. Contributions are tax deductible.
    3. Distributions are tax-free at withdrawal.
    4. Distributions must begin at age 70 1/2.
19. Which of the following are tru about College Savings Iowa, a savings and investment vehicle for a child's higher education? (Pick three):
    1. Contributions up to $500 yearly.
    2. Contributions up to $2000 yearly.
    3. Contributions are not deductible.
    4. Contributions are deductible on the state return.
    5. Contributor determines the investment.
    6. Fund administrator determines the investment.
20. Who among the following will not have to pay federal estate taxes:
    1. Heirs of an individual whose estate amounts to $650,000 or less.
    2. Heirs of a couple whose assets amount to $1.3 million or less.
    3. An individual who inherits a spouse's assets up to $650,000.
    4. An individual who inherits a spouse's assets in any amount.