1. By paying my 20-year mortgage every two weeks rather than every month, I'll pay the debt off:
a) nearly three years sooner
b) 12 years sooner
c) after 20 years. It doesn't matter if you pay every month or twice a month – it's all the same.
Answer: a. Bimonthly payments mean you make two more payments every year than you would if you paid monthly. If your mortgage is $200,000, monthly payments of $1,314.25 will see that debt gone after 20 years. Make bimonthly payments of $657.13 and the debt disappears after 17.43 years. Up that to weekly payments of $328.56 and you'll be mortgage-free after 17.41 years. Choose a mortgage that lets you make extra payments or lump-sum contributions toward the principal, and make as many of them as you can.
2. I have a low-interest-rate credit card (seven per cent). If I pay $100 a month on my $5,000 balance, the debt will be paid off in:
a) one year
b) 15 months
c) more than 14 years
Answer: c. You'll pay $1,778.49 in interest. Why don't you just set your wallet on fire? It's time for a new strategy. Start paying cash for everything, and then pay off your debts, starting with the one with the highest interest rate. Switch to lower-rate options (like a line of credit) and get rid of high-interest retail cards (28 per cent is too much).
3. If things get rough, I can always declare bankruptcy. All my debts will be wiped out and I'll get new credit:
a) in one year
b) in seven years
Answer: b. Not all debts are wiped out. Alimony and child support have to be paid no matter what. And unless it has been 10 years since you graduated, student loans are generally exempt from bankruptcy protection. Plus, most assets covered by secured debt (cars and houses) will be seized and sold to cover that debt. Unsecured debt (credit cards and personal loans) can be forgiven or reduced. Here's how: Hire a bankruptcy trustee, who, on your behalf, makes a proposal to your creditors.
If they accept it, creditors must stop harassing you, they can't garnishee your wages (and must stop doing so if they are) and they give up the right to sue you. The bankruptcy stays on your credit report for up to seven years. Make all the payments you've promised. Your report should be clean enough to get another credit card. Don't blow it this time: a second bankruptcy stays with you for up to 14 years.
4. My life insurance policy should be worth:
b) a year's salary
c) enough to cover my final expenses (funeral, taxes) and support my dependents
Answer: c. The rule of thumb is five to 10 times your annual salary, but there's no precise formula. Ask yourself: Do you want to replace your salary, or will your spouse be able to manage without that money? (If you're a stay-at-home mom, how much would you pay someone to do the work you do?) How long do you want to have that money coming in? Are there other considerations (a special needs child)? Add up these expenses, as well as your share of regular expenses for that time period, tack on five per cent for inflation, then deduct any investments that will be sold when you die. Voilà -- that's how much you need.
Page 1 of 3 - Keep going for wills and education funds!
5. To avoid living off cat food during my retirement, I'll need investments worth:
a) $1 million
b) nothing -- government programs will support me
c) about 15 times my annual expenses
Answer: c. While government programs may not be enough to support your lifestyle during your golden years, chances are there will be some state-sponsored money for you in the form of the Canada Pension Plan (CPP), and, for low-income seniors, Old Age Security (OAS) and the Guaranteed Income Supplement (GIS). (To see how much CPP you're eligible for, visit sdc.gc.ca. You can also find OAS and GIS payment rates as of this year.) Still, you should open an RRSP as soon as possible. For every dollar you contribute to an RRSP you get an equivalent tax deduction. Yes, you will pay tax on the money when you withdraw it, but at that point you will, presumably, be in a lower tax bracket than you are now.
6. Last week my financial planner was babbling about front-end and back-end loads. She was referring to:
a) the type of RRSP I have
b) the fee I pay when I buy and sell mutual fund units
c) language that wouldn't make her mother proud
Answer: b. If you invest $5,000 in Fund XYZ and it has a front-end load of four per cent, your investment would be $4,800 because the load would cost you $200 off the bat. Back-end loans are paid if you sell your mutual fund units within a certain period of time, usually within seven years.
Let's say you invest $5,000 in Fund ABC and sell after six months. If the back-end load is five per cent, you'll pay $250 for the privilege of getting out of the fund.
7. If I die without a will, my dog, my grandma's china and all my worldly possessions will:
a) go to the government
b) be split between my spouse and my children
Answer: c. It's called dying “intestate,” and what happens after that depends on where you take your last breath. Most provinces have a spouse's share arrangement, which means anywhere from $40,000 to $200,000 of your estate will go to your spouse. Children share in only the value of the estate that exceeds the spouse's share.
Here's a scenario to consider. You die peacefully after a full life, leaving a husband and two grown kids behind. Your estate is worth $150,000. If you live in Ontario, where the spouse's share is $200,000, your husband gets everything. If you live in Alberta, where the spouse's share is $40,000, your husband and children split $110,000 (the difference between the spouse's share and your estate). There's no provision for your grandchildren and no donations to your favourite charity. Bottom line? No situation is too simple, and no estate is too small for a will. Visit a lawyer and draft one.
8. By the time my three-year-old is 18 and ready for university, a four-year degree will cost:
Answer: b. Many variables affect that number. Will your kid live at home or in residence? What will she study? How will governments fund education in 15 years? These questions are impossible to answer because your little Doogie Howser hasn't mastered math yet. Assume that the final tab will probably be more than you have, so open a registered education savings plan (RESP). Ottawa contributes 20 per cent of what you do, up to $400 a year per child, to a lifetime maximum of $7,200 per child. If you put away $25 a week for 18 years, with your contributions, the government grant and a return on your investments of five per cent, you'll have $45,000. You don't get a tax deduction, but when your little one withdraws your contributions she doesn't pay tax on it. And when she accesses the investment returns and grant money, that's taxed in her hands in a low tax bracket.
Page 2 of 3 - Read page three to learn your final score!
9. My husband and I have a combined annual income of $150,000, or about $80,000 after taxes. Excluding our mortgage, a healthy level of debt for us would be:
Answer: c. Here are some signs that your debt level is too high: You can't put money aside for regular savings; you can't qualify for new credit; your cards are maxed out; and you can make only the minimum payments every month. Your non-mortgage debt shouldn't exceed 20 per cent of your after-tax income. If it does, you need a plan to stop paying interest and start putting your money to work.
10. Not all debt is bad. My “good” debt includes:
a) my car loan and RRSP loan
b) my mortgage and my student loan
c) my home equity line of credit
Answer: b. A debt is good if it produces an income (loan for a rental property), will lead to higher earning power (student loan) or covers an appreciating asset (your home). Your car, however, is a depreciating asset, and depreciating assets are bad. Lifestyle debt (eating out, clothes -- anything disposable) falls in that category as well, especially if you charge it to a credit card (the interest drives up the final cost). A rule to live by: pay cash for consumables; use debt to grow your net worth.
How you score:
• 0 to 2 questions wrong: You're a whiz. You've got a solid grasp of financial planning. You save for your future, pay off your bills and know how to take care of your financial health. Congratulations. Go buy yourself something. We know you'll pay cash.
• 3 to 5 questions wrong: There are a few gaps in your knowledge worth touching up. Visit websites Advocis.ca, Bankruptcy-canada.ca, talk with your banker and get the basics covered. You don't need to be licensed to sell stocks, but you need to know what's happening with your money.
• If you missed 6 or more questions: Yikes! Either you've got money to burn (must be nice!) or you need to sign up for Remedial Money 101. Make improving your financial knowledge a priority. Consider a course or attend seminars (financial institutions often sponsor them). No time? Trade in the tabloids for a book on personal finance. After a couple of months, you may not know who's the latest love for Tom Cruise or Brad Pitt, but you'll have a much better understanding of things closer to home -- namely the state of your personal balance sheet
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