Are you satisfied with your knowledge about financial matters?  Although the following true/false quiz is certainly not a comprehensive test of your understanding of all the areas of personal and family money management, it should provide an indication of whether or not it would be worthwhile for you to increase your knowledge about financial matters.

 True/False Statements:

1.   Borrowing is a good way for a person to raise his standard of living.

2.   A person can avoid being in financial bondage (i.e., not having peace of mind with regard to his financial affairs) by not being heavily in debt.

3.   Even if a person pays off the entire balance on his credit cards every month, his use of credit cards, rather than cash, is likely to raise considerably his level of spending.

4.  To pay for a previously unplanned expenditure, it generally is better to take money from savings rather than use a credit card.

5.   It is usually not a good idea for a person to have extra taxes withheld from his earnings in order to get a big refund when he files his income tax return.

6.   When a store advertises grocery items, that is a good time to purchase those items from that store.

7.   One of the best financial investments a person can make is to remodel his house.

8.   A dollar that is saved is worth more than a dollar that is earned.

9.   Cash is the safest investment that a person can have.

10.  It is possible for many people to earn an aftertax return above 10% on their money, without taking substantial risk.

Answers:

1.   False.  The opposite is actually true.  Borrowing steadily reduces your ability to maintain your standard of living.  Because of the interest charges you will have to pay, the more you borrow, the less money you will have available to meet your needs in subsequent years.

2.   False.  There are many symptoms of financial bondage, in addition to being heavily in debt.  These other symptoms include, but are not limited to, deceitfulness in financial matters, greediness, investment worries, and lack of financial commitment to Christian ministry.

3.   True.  On page 124 of his book entitled Master Your Money, Ron Blue, a prominent Christian writer and lecturer on family financial matters, says,

I read somewhere that the mere use of credit cards will cause a family to spend 34% more, regardless of whether the full statement is paid off each month or not.  I found that totally unbelievable and spent a year trying to disprove it.

[A]fter living on a straight cash budget for a year, without using credit cards at all, our living expenses decreased by 33% from a level I had thought was “bare bones” to begin with.

Although Ron Blue does not say so, the percentage increase in spending to which he is referring is undoubtedly applicable to only the types of expenditures that typically can be paid with a credit card.  Thus, mortgage payments, utility bills, etc. would not be included in determining the percentage.  Even so, it is understandable if you have some skepticism regarding the size of the percentage increase in spending that allegedly results from using credit cards.  Regardless, it is important for you to realize that the use of credit cards will considerably increase your level of spending.

4.   True.  Generally, it would be better for you to pay for any expenditure with money from savings, rather than with a credit card, unless you pay off the entire credit card balance before any interest charges are incurred.  However, it would be even better not to make an unplanned expenditure (i.e., a purchase that has not been included in your annual budget).  Of course, such an expenditure will be necessary if it is a result of a genuine emergency situation.

By using money from your savings to pay for an expenditure, you may “earn” 18% or more, if you otherwise would have used your credit card to make the purchase and would have incurred interest charges each month on the unpaid balance.  Thus, your “earnings” will be at a rate that is several times the rate you would have earned by leaving the money in savings.  If subsequently, before you have had time to replenish your savings, you need to make an expenditure that you had intended to pay for with money from your savings, you may need to borrow at that time, but you should still be in a stronger financial position than if you had borrowed earlier.

5.   True.  While you may think that having extra taxes withheld from your earnings is a good method to force yourself to save, it really isn’t.  If you want to force yourself to save, you can arrange for a bank or some other financial institution to transfer a specific amount of your earnings for each pay period from your checking account into some type of savings or investment account.  This will provide you with income on your savings, whereas if you have more taxes than necessary withheld from your earnings, you will receive no income on that money while it is being held by the government and, therefore, you will be giving the government an interest-free loan.

6.   False.  Just because an item is advertised in a newspaper does not mean it is selling for less than its usual price.  Many advertised grocery items are selling for their regular price.  Furthermore, even when an item is on sale at a particular store, it may still be priced higher than at a competitor.  Also, even if a sale item is selling for much less than its regular price, it still may be excessive for your budget.

7.   False.  According to The Wall Street Journal (2-7-97), “Home improvements have never been great investments when it comes to recouping at resale.”  Surveys indicate that kitchen remodeling usually provides the best payback, but even then the return averages only about 94% on every dollar that is spent for the remodeling, which means that on an expenditure of $10,000, you can expect to get back approximately $9,400 when you sell the house.

8.   True.  Money that is saved (i.e., not spent) is actually worth more than money that is earned, because you don’t have to pay any additional taxes on money that you decide not to spend, whereas you certainly are supposed to pay taxes on money that you earn.  To equal $100 of savings, you would need to earn approximately either $133 or $154, depending on whether your combined marginal tax rate for federal income taxes, state income taxes, Social Security, and Medicare is 25% or 35%, respectively, which it is for most taxpayers in North Carolina.

9.   False.  Not only can cash be lost, destroyed, or stolen, especially if you keep it “somewhere around the house,” but also it will continue to lose its value, because of the effects of inflation.  If inflation averages only 3% per year, the purchasing power of cash that is not invested will decline about 25% in 10 years, and approximately 45% in 20 years.

10. True.  When you pay down the principal you owe on a credit card or perhaps some other type of consumer borrowing, you are, in effect, earning the equivalent of the interest rate being charged by the creditor, which in many cases is 18% or higher.  This is an aftertax return, because you don’t have to pay any income taxes on savings that result from interest payments that you don’t need to make.

If you want to learn more about personal or family financial money management, you are encouraged to read our other Personal Financial Matters articles or contact us about getting free counseling to assist you with your financial affairs.