Financial Literacy Quiz — 50 Questions with Answers

Inflation means that over time, in general:

Answer The same money buys fewer goods and services

Inflation is about what money can do, not what the number on it says. The note in your pocket keeps its face value while the basket it fills gets smaller.

Your net pay is the amount:

Answer Left after tax and deductions

Gross pay is what the job is priced at; net pay is what actually lands in the account after tax and other deductions come out. The gap surprises most people on their first payslip.

How is net worth calculated?

Answer Everything you own minus what you owe

Net worth is a snapshot of a stock, not a flow. Income tells you what came in this year; net worth asks what would be left if everything owned were sold and everything owed were settled today.

An asset is called 'liquid' when it:

Answer Can be sold for cash quickly at little loss

Liquidity is about speed without a haircut. A house may be worth a great deal and still be illiquid, because turning it into cash quickly usually means accepting less than it is worth.

What is opportunity cost?

Answer The value of the next best option you gave up

Opportunity cost is the option you did not take. Money spent on one thing is not just gone, it is the other thing you could have had instead, which is why it shows up in decisions that look free.

Which of these is a liability rather than an asset?

Answer An unpaid credit card balance

The test is direction, not size. A liability is money owed to someone else, so an unpaid card balance counts even if the shopping it paid for is long finished.

Which item is usually counted as a fixed monthly expense?

Answer Your monthly rent

Fixed here means the amount, not the importance. Rent arrives at the same size whatever kind of month you have had, while fuel and meals out move with how you live.

What is an emergency fund for?

Answer Unexpected costs, easy to reach

An emergency fund is defined by two things at once: it is for costs you did not plan, and it can be reached without notice. An investment that meets the first test but not the second is doing a different job.

A household runs a deficit when:

Answer It spends more than it earns in a period

A deficit is measured over a period, not against a target. Spending more than came in during the month is a deficit even for a household with large savings.

Depreciation describes:

Answer An asset's value written down over its useful life

Depreciation spreads a cost rather than recording it all at once. A van bought this year is used for several years, so its value is written down across the years it works.

Compound interest differs from simple interest because:

Answer Interest is earned on interest already added

Simple interest keeps paying on the original sum. Compound interest pays on the balance, which by then includes the interest already added, so each period starts from a slightly bigger number.

The 'rule of 72' is a quick way to estimate:

Answer How long money takes to double at a rate

Divide 72 by the annual rate and you get a rough number of years to double. It is an approximation that happens to be close over the range of rates people usually meet.

APY differs from a plain annual rate because it:

Answer Allows for compounding in the year

A plain annual rate says what is charged per period. APY folds in how often that interest is added, which is why two accounts quoting the same rate can pay different amounts over a year.

Your savings pay 2% a year while prices rise 3% a year. Your real return is:

Answer Negative — your money buys less

The real return is what is left after inflation. Earning 2 percent while prices climb 3 percent means the balance grows while the shopping it buys shrinks.

Deposit insurance at a bank is designed to protect:

Answer Deposits if the bank itself fails

Deposit insurance covers the failure of the institution, not the performance of what you bought. It answers the question of what happens if the bank itself cannot pay you back.

Which of these is normally NOT covered by deposit insurance?

Answer A mutual fund sold at the bank

The line falls between a deposit and an investment. A fund sold across a bank counter is still an investment whose value can fall, so it sits outside the deposit guarantee even though the branch is the same.

Why does saving the same amount earlier tend to end with a larger balance?

Answer Interest has longer to compound

The extra balance comes from time, not from the size of the payments. Money put in earlier spends more periods earning interest on interest already earned.

A fixed-rate term deposit means:

Answer The rate is agreed in advance for the term

Fixed means the rate cannot move for the agreed term, in either direction. That certainty is the trade for giving up access to the money until the term ends.

A 'nominal' interest rate is the rate:

Answer Before inflation is taken into account

Nominal is the rate as quoted, before inflation is taken out. The real rate is what is left afterwards, and the two can point in opposite directions when prices are rising quickly.

Moving a set sum into savings on payday, before spending, is known as:

Answer Paying yourself first

The phrase describes the order rather than the amount. Saving is treated as the first payment out of the account rather than whatever survives the month.

A credit score is best described as:

Answer An estimate of how likely you are to repay

A credit score is a prediction, not a report card on wealth. It estimates the chance of repayment from past behavior, which is why a high earner with missed payments can score below a modest earner who never misses one.

Which of these usually damages a credit score the most?

Answer Missing payments or paying late

Payment history carries the most weight because it is the most direct evidence of the thing being predicted. Checking your own score is a soft inquiry and does not move it.

Credit utilization means:

Answer How much of your credit limit you are using

Utilization is a ratio, not a total. Owing a small sum on a card with a small limit can look heavier than the same sum on a much larger limit.

Paying only the minimum on a credit card each month usually means:

Answer The debt lasts longer and costs more

The minimum is set to keep the account in good standing, not to clear it. Interest keeps accruing on what is left, so the balance shrinks slowly while the total paid grows.

A secured loan is one that:

Answer Is backed by an asset the lender can take

Security is the lender's fallback. Because a specific asset can be taken if the loan is not repaid, secured lending usually carries a lower rate than unsecured lending of the same size.

With a variable-rate loan, the payment can change because:

Answer The rate moves with market rates

A variable rate is tied to a reference rate that moves. The borrower carries that movement, which is the difference between this and a fixed-rate loan of the same amount.

The 'principal' of a loan is:

Answer The amount borrowed, before interest

The principal is the sum borrowed. Interest is the price paid for using it, and a monthly payment is usually a mix of the two rather than either one alone.

A debt-to-income ratio compares:

Answer Your debt payments with your income

The ratio compares what the debts demand each month with what comes in each month. Two borrowers with the same total debt can look very different once income is in the denominator.

A grace period on a credit card is:

Answer Time to pay before interest starts

A grace period is a window, not a discount. Pay in full within it and no interest is charged; carry a balance past it and interest usually applies from the transaction date.

Which of these usually carries the highest interest rate?

Answer A credit card cash advance

Cash advances usually price highest because they are unsecured and often start charging interest immediately, with no grace period. The other three are all backed by something the lender could take.

Diversification means:

Answer Spreading money across different assets

Diversification does not raise the expected return; it spreads the sources of risk. Holding many different things means no single one can decide the outcome.

An index fund aims to:

Answer Track the performance of an index

An index fund is built to match, not to win. It buys the index as it is, which is why its result tends to sit close to the index minus its costs.

Compared with holding one company's shares, a broad index fund has:

Answer Less exposure to one company

Spreading across many companies removes the risk that one of them fails. It does not remove the risk that the whole market falls, because in that case everything in the basket falls together.

An expense ratio is:

Answer The yearly cost of running the fund you hold

The expense ratio is charged whether the fund gains or loses, and it comes out of the fund rather than arriving as a bill. Small differences compound in the same way returns do.

In general, an investment with a higher expected return also has:

Answer A greater risk of losing money

Higher expected return is compensation for bearing more uncertainty. If a higher return came without more risk, there would be no reason for anyone to hold the safer asset.

When market interest rates rise, the price of existing bonds usually:

Answer Falls

A bond already issued pays a fixed coupon. When new bonds start paying more, the only way the old one can compete is for its price to fall until the yield matches.

A dividend is:

Answer A share of profit paid to shareholders

A dividend is a distribution of profit to owners, decided by the company. It is not guaranteed, which is what separates it from the interest a bond promises.

Investing a fixed sum at regular intervals, whatever the price, is called:

Answer Cost averaging

Buying the same amount at set intervals means more units when prices are low and fewer when they are high. The method is about removing the timing decision, not about improving returns.

One practical difference between an ETF and a traditional mutual fund is that an ETF:

Answer Trades on an exchange during the day

An ETF is priced continuously while the exchange is open, so it can be bought and sold at a price that moves during the day. A traditional fund settles at one price struck after the close.

A 'bear market' is a period in which prices:

Answer Fall well below recent highs

A bear market is defined by depth, not by mood. The usual marker is a fall of about a fifth from a recent high, which distinguishes it from an ordinary dip.

An insurance premium is:

Answer The amount you pay to keep the cover

The premium is what keeps the policy alive. It is paid whether or not a claim is ever made, which is what buys the cover in the first place.

A deductible (or excess) is:

Answer What you pay before the insurer pays

The deductible is the first slice of any claim, carried by the policyholder. A higher deductible usually means a lower premium, because the insurer is being asked to cover less.

Term life insurance differs from whole life insurance because it:

Answer Covers a fixed term with little cash value

Term cover rents protection for a set number of years and pays only if death occurs within them. Whole life is priced to last a lifetime and builds a cash value, which is why it costs more.

The basic purpose of insurance is to:

Answer Transfer the risk of a costly event

Insurance moves a risk you could not absorb onto a pool that can. It is not a savings product, and over many policyholders the pool is expected to take in more than it pays out.

Liability cover in a motor policy pays for:

Answer Injury or damage you cause to other people

Liability cover answers for harm done to others. Damage to your own vehicle sits under a different part of the policy, which is why the two are priced separately.

A tax credit differs from a tax deduction because a credit:

Answer Cuts the tax owed, not the income taxed

A deduction shrinks the income that gets taxed; a credit shrinks the tax itself. The same headline figure is therefore worth more as a credit than as a deduction.

Tax withheld from your pay by an employer is:

Answer Tax paid up front and settled at filing

Withholding is an installment plan for tax, collected as the income is earned. The filing at the end reconciles what was withheld against what was actually owed.

Taxable income differs from gross income because taxable income is:

Answer What is left after allowances are applied

Gross income is everything received. Taxable income is what remains once allowances and exemptions have been applied, and it is that smaller figure the rates are applied to.

A progressive income tax means that:

Answer Higher bands of income are taxed more

Progressive refers to the bands, not to the whole income. Moving into a higher band raises the rate on the income inside that band, not on everything earned below it.

This quiz is general information, not investment or tax advice. Allowances and cover limits are best treated as:

Answer Figures to check against the current rules

Thresholds, allowances and cover limits are set by rule and revised, often yearly. That is why this quiz keeps to how the ideas work rather than quoting figures that would date.