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Do You Know the Basics of Financial Literacy?

Now is the perfect time to check your financial knowledge. Finding out what you know (and don’t know) can help you take the first step toward mastering your money.

As much as you may hate to admit it, money makes the world go ‘round, and understanding how your money works (or doesn’t work) for you determines whether you’ll be along for the ride or left in the dust.

Knowing the basics – your income, expenses, debts and savings – is the first step toward taking control of your money and improving your financial well-being. In fact, if you’re like most people, learning basic money management skills today can help you take more control of your financial future.

A survey from the National Endowment for Financial Education shows that 76 percent of adults in the United States feel financial stress and nearly half (49 percent) of adults live paycheck to paycheck.[1] The good news is that according to National Financial Credit Counseling’s annual survey, 75 percent agree that getting answers to their financial questions from a professional would benefit them.[2]

Take this short quiz to see how much you know about money management and where you can improve, then explore additional resources with advice from PNC’s professionals to you help take control now and establish healthy financial habits.

1. As a rule of thumb, how much of your income should you expect to spend on living expenses?

a.     100 percent

b.    70 percent

c.     50 percent

d.    30 percent

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2. True or False: If you want to buy a home, you need to have a 20 percent down payment.

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3. If you invest $25,000 in a retirement account today, how much could it potentially be worth in 40 years, assuming an 8 percent annual average return?

a.     Around $175,000

b.    Around $250,000

c.     Around $375,000

d.    Around $550,000

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4. True or False: If you consistently receive large tax refunds, you should consider adjusting your withholdings from your employer.

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5. In addition to a will, what other documents should be included in your financial plan?

a.     Advance medical directive

b.    Durable power of attorney

c.     Revocable trust

d.    All of the above

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6. When the market drops, what should you do?

a.     Pull money out of your investments until the market is stable

b.    Keep calm and call your financial advisor

c.     Invest all of your available funds

d.    Time the markets by buying assets that are doing well and reducing your exposure to assets that are declining

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7. True or False: With a Roth IRA, contributions are made after-tax. With a Traditional IRA, contributions accumulate tax deferred until withdrawal.

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8. Which of the following is true about permanent life insurance policies?

a.     They accumulate cash value

b.    They can provide a beneficiary with a death benefit

c.     The premiums can be higher than for term insurance

d.    All of the above

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9. True or False: When you retire, Medicare will cover all of your medical expenses.

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10. How long should you keep documents stating that you have paid off a loan, including student loans, auto loans and mortgages?

a.     Six months

b.    One year

c.     Five years

d.    Forever

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Correct answer: 70 percent

Every family is different, but generally, a good allocation plan is as follows:

  • 70% of income for living expenses
  • 20% of income for a “buffer fund” (saving for emergencies or unexpected expenses)
  • 10% of income for long-term savings (retirement, college, etc.)

Learn more about how to create and stick to a budget » 

Correct answer: False

Generally, the biggest obstacle to homeownership is having enough money for the down payment and closing costs, and most first-time homebuyers haven’t saved enough to put down the full 20 percent. With a down payment of less than 20 percent, a buyer may need to pay for mortgage insurance. By putting down less than 20 percent, buyers can use any leftover cash for home improvements.

Learn the four steps to take before buying a home, then read about mortgage insurance and whether it can help you buy a home sooner than you thought »

Correct answer: Around $550,000

After 40 years, that investment could potentially be worth around $550,000 if you receive an 8 percent annual average return.

Learn more about how to review your retirement accounts and the four basic options you may have for 401(k)s to help reach your goals »

Correct answer: True

If you’re getting a large refund check, that means you’ve essentially loaned money to the U.S. government throughout the year, and they’re giving it back to you without interest. If your refund is close to $1,000, $2,000 or even higher, you might want to consider making some adjustments to your W-4.

Learn more about why bigger isn’t always better when it comes to tax refunds »

Correct answer: All of the above

Keeping financially fit begins with ensuring you have all the appropriate, up-to-date documents that reflect your present situation and wishes. Four fundamental building blocks should be included in most financial plans:

  • A will assures your personal assets are distributed to individuals or organizations you intend to receive such assets when you pass away.
  • An advance medical directive places someone you trust in a position to make important medical decisions on your behalf.
  • A durable power of attorney allows another person to manage most or all of your non-medical affairs.
  • A revocable trust can be paired with the durable power of attorney to help simplify financial affairs. The trust may safeguard your assets in the event that you become incapacitated. It also could reduce estate settlement costs.

Learn more about how to check up on your financial wellness » 

Correct answer: Keep calm and call your financial advisor

When it seems like the sky is falling, the natural reaction is to panic. It’s certainly easier said than done, but do your best to remain calm and remember that corrections and market downturns are normal and healthy. Contact your financial advisor for a financial check-up. Your advisor will check your asset allocation – what stocks, bonds and assets you are invested in – and help you determine how the rocky markets are affecting your financial health.

Learn more about how to handle a market downturn » 

Correct answer: True

Roth IRA contributions are made after-tax, while Traditional IRA earnings accumulate on a tax-deferred basis until withdrawn. If you expect your tax rate will be lower when you retire, a traditional account may offer you more spendable income for retirement. If you expect your tax rate will be higher than it is now or the same upon retirement, a Roth account may provide you with more spendable income later.

Learn more about how to choose a retirement account » 

Correct answer: All of the above

Permanent life insurance policies accumulate a cash value. They can offer protection for a lifetime and provide a beneficiary with a benefit upon your death. Because of this, and because of the lifetime coverage and the ability to build cash value on a tax-deferred basis, the premiums are higher than for term insurance.

Learn more about how life insurance can help offer the protection you need to reach your financial goals »

Correct answer: False

Some people think Medicare will cover everything and it certainly does not. Even people who have insurance can suffer financial hardship because of mounting medical bills. Before retirement, think carefully about the risks you may face and do what you can to plan for healthcare costs.

Learn more about how to plan for health costs in retirement »

Correct answer: Forever

Keep loan discharge documents forever, as one day you may need proof that you did, indeed, pay off a loan, including student loans and automobiles.

Learn more about what documents you need to save and what you can shred » 

Every April, National Financial Literacy Month highlights the importance of financial well-being and teaches Americans how to establish and maintain healthy financial habits. PNC hosts financial education classes for tens of thousands of participants. These programs are at the core of PNC’s culture.

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