The money quiz

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
c) never

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:
a) $500,000
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.