Reports estimate that the level of financial literacy drops every year, with less than half of teens and adults knowing some crucial financial habits. See how you measure up against these common questions about finance:
1. How much of your monthly income should be spent on a mortgage or rent?
a) 50% b) 43% c) 31%
The answer is C, 31%. Having a mortgage or rent over 31% of your monthly income can significantly jeopardize your ability to pay for other essential living expenses like food, gas, and unexpected medical or other needs.
2. How much should you have saved in an emergency fund?
a) $1,000 b) 6 months worth of expenses c) 2 months worth of expenses
The answer is B, 6 months worth of expenses. In the event of job loss or medical complications, having at least 6 months worth of essential living expenses saved can keep you out of financial insolvency and the risk of asset repossession or foreclosure while you get back on your feet.
3. Which is the best way to improve your credit?
a) close old accounts b) consolidate your debt c) pay down your debt
The answer is C, pay down your debt. Having a debt balance less than 30% of your available limit is the best way to boost your credit. Consolidation won’t do much because your debt is still high and your available credit is reduced. Keeping old accounts open can help boost your score, but not as much as a lower debt balance.
4. If your credit score drops because you missed a payment, how can you improve your score?
a) pay bills on time b) hire a credit repair company c) cancel your credit cards
The answer is A, pay your bills on time. A few consistent monthly payments can get your account out of delinquency and improve your score. If you cannot afford to pay your bills, contact a Louisville bankruptcy lawyer to find out options for resolving your financial hardship.
5. Which payment plan results in the least amount of interest on a credit card over time?
a) paying minimum b) paying full balance every month c) paying minimum plus 5%
The answer is B, paying the full balance every month. Paying off your balance every month means you do not have a balance that is subject to any interest fees. While you may not be able to pay off your balance in full every month, commit to paying as much as you can every month to pay off the balance quickly. Only paying minimum balances is going to cost you thousands in the long run.