Here's a 12-question quiz from Kiplinger on basic financial rules of thumb. I took the quiz and got 10 of 12 correct -- and the two I missed I TOTALLY disagree with their reasoning (I won't go into details so as to not spoil the quiz for you.) But I guess that's what makes personal finance interesting, huh?
Anyway, if you like this sort of quiz, check it out and then come back and let us all know how you did.
I think we should save more than 10%!!!!
Posted by: beastlike | January 14, 2008 at 05:47 PM
I got 10/12 as well. I do not think you should buy a home more than 2 1/2 times your annual income though. Also, I got the ARM question wrong, but I assumed a long-term living situation.
Posted by: Sheyenne | January 14, 2008 at 05:55 PM
i missed 2 as well. nothing bad about saving more than 10%. And I disagree that a Roth IRA is always the better choice. It makes sense for most but if you don't qualify on income giving to a traditional to roll into a roth in 2010 makes more sense. check me down as minus those 2
Posted by: | January 14, 2008 at 05:56 PM
i missed two too! gee, i didn't think 10% was enough to save and i would always close a credit card account rather than just cut up the cards!! on a practical level, i've established credit so i disagree with their reasoning. therefore, as adjusted, i'm 10 for 10, yup 100%. beat that!!
Posted by: | January 14, 2008 at 06:08 PM
Nothing wrong with buying a house that's worth 3x your salary... Lets say I wanted to buy a $300k house on a $100k salary, why is that a bad thing? you can't even tell me what my monthly payment is, because you haven't specified an initial loan to value number OR an interest rate.
Posted by: Jake | January 14, 2008 at 06:19 PM
I actually thought the test was pretty silly. At least some of the answers will depend on personal circumstances. I disagreed with at least 4 questions.
Posted by: traineeinvestor | January 14, 2008 at 08:02 PM
Trick questions as far as I'm concerned. #12 says "you" can retire comfortably on a million bucks--false? You = me in the question. Well, "I" can so it's true for me. I missed the life insurance question, but then I don't have dependents so I don't need life insurance. I also missed the Roth IRA question. I don't think a blanket statement can be made that the Roth is better than the traditional IRA. Sure it may be if you want to load up the answer the way they did.
Posted by: Rolltimer | January 14, 2008 at 08:08 PM
Too many absolutes. If you want to save more than 10% your answer is wrong, a Roth IRA is not ALWAYS better than a traditional IRA. Just some examples.
Posted by: justin | January 14, 2008 at 08:26 PM
great quiz. A few of them can be debatable because it's not a perfect world - you have to take into account personal circumstances. But all in all, it's a great guideline. Thanks for the link.
Posted by: Ted | January 14, 2008 at 10:38 PM
All but one, a few were trick questions though, save 10%, sure, but should save more. A Roth is most definitely NOT always better, but it may be.
Posted by: Lord | January 14, 2008 at 11:06 PM
Missed only the 10% one - thought it should have been more. Style of questions are kind of inconsistent - some have absolute wording (always or never) and others don't.
I also got some others right that I didn't agree with.
I'd be interested in the follow-up to the questions you disagreed with.
Posted by: DanR | January 15, 2008 at 12:50 AM
The Roth question seemed like a "gotcha." I thought they were going to say it was best for most, but might not be best if you hadn't secured your 401K.
Posted by: JT | January 15, 2008 at 05:36 AM
I got 8 out of 12, but I believe Kiplinger is wrong, not I. ;)
For example:
Of course, you should save more than 10%.
An emergency fund should be 6 months, not 3.
A Roth IRA is only better than a traditional IRA only if your tax rate will be higher during retirement than right now. What if the fair tax happens?
Never buy a house for more than 2.5 times your income unless you have a lot of cash or current equity on hand. Basically, you shouldn't finance more than 2.5 times your income, but it is ok to buy a house more than 2.5 times your income, just not a mortgage.
Also, there other questions that I answered correctly, but did not agree with them absolutely either.
Crappy test overall.
Posted by: Ryan | January 15, 2008 at 08:35 AM
I got 10/12. A Traditional IRA may be better in some circumstances than a Roth (not always, but it can be). I also missed the fixed-rate mortgage question...I was assuming a long term living situation.
Posted by: mjmcinto | January 15, 2008 at 09:03 AM
I got a bunch wrong, but then again, I still think I am right and they are wrong! :-)
For example, I think ARM mortgages are almost always the wrong way to go. The interest rate difference isn't that much, and you have no guarantees that your current plans (of moving in X number of years) will happen. I'd rather have a predictable payment if my plans change than save a bit in the short term. If you need a scenario for this, what if you're married and one spouse loses their job and is without work for a while. Now you can't afford to uproot and move like planned (due to all the expenses, and perhaps some time without ANY income) and with an ARM, your house payment suddenly jumps. Suddenly not only is moving out of reach... even staying in your current home is difficult.
Also, you can certainly retire comfortably (in today's environment, even with health care costs) on 1 million. A "comfortable" standard of living should be quite doable on that amount. However, some people may WANT a much higher standard of living than what is "comfortable". As an earlier commenter indicated, this is somewhat dependent on the person. That said, since I'm still far from retirement, I know that by the time I retire much more will be needed (to adjust for inflation).
Posted by: Mike H | January 15, 2008 at 12:35 PM
I got 11/12:
I definately don't agree with the Roth vs Trad. IRA question. The Roth is great if you are currently living in a lower tax braket than you plan to in retirement. Unfortunatley the tax rates aren't fixed and my change. The best option is to diversify between pre and post tax accounts. According to this answer I should switch over to contributing to my Roth 401(k) to get the same benefits.
I didn't like having to reread the questions and test the phrases to see if "at least" wasn't implied in the question. This is an excercise i use at work when dealing with the lawyers on contract negotiations and it shouldn't apply to a test of the general public's knowledge.
Posted by: Adam | January 15, 2008 at 02:13 PM
Its all in the wording with this Quiz: I would like to think they meant at least 10%, but I think they got that one wrong, not me.
Also, I don't want a house that costs that much, regardless of the monthly pmt.
Posted by: JR | January 15, 2008 at 02:27 PM
I got 3 wrong and basically some of the same ones commented on above. I also believe that many are subjective and depend on individual cirsumstances. Although I like Kiplinger's, this was a pretty poorly worded quiz.
I read several finance rags and blogs and almost all of them recommend at least 6 mos of living expenses, some more conservative ones recommend a full year of expenses in savings to cover you for an accident that renders you disabled.
I agree with Mike H, that almost always ARM mortgages are the wrong way to go. The rates aren't that different (maybe on Jumbo loans) and you never know when in life your circumstances will change, especially your finances.
Posted by: oimcherry | January 15, 2008 at 05:13 PM