Quiz: Are You Ready for Financial Independence?

If you’re a college student or recent graduate, welcome to full-fledged adulthood. Between looking for your first job and starting to pay your own bills, you’re likely becoming more well-versed when it comes to personal finances. But are you ready for financial independence? If you think you may be, take this quiz to see how much you know. 

QUESTIONS

1. HOW MUCH MONEY SHOULD YOU HAVE SAVED IN AN EMERGENCY FUND?
   A. One to two months’ worth of expenses
   B. Three to six months’ worth
   C. One year’s worth
   D. Two years’ worth
    

2. WHICH TYPE(S) OF STUDENT LOANS ARE CURRENTLY ON PAUSE UNTIL 2021?
   A. Federal student loans
   B. Private student loans
   C. Both
   D. Neither 

3. TRUE OR FALSE: WHEN CREATING A DEBT-PAYDOWN PLAN, A GOOD RULE OF THUMB IS TO PRIORITIZE PAYING THE DEBTS WITH THE HIGHEST INTEREST RATE FIRST.
   A. True
   B. False

4. WHICH OF THE FOLLOWING ACTIONS CAN HELP YOU PAY DOWN CREDIT CARD DEBT?
   A. Negotiating a lower interest rate with your credit card company
   B. Automating your payments
   C. Transferring your balance to a card with a lower interest rate
   D. All of the above

5. TRUE OR FALSE: CARRYING A BALANCE ON YOUR CREDIT CARD CAN HELP IMPROVE YOUR SCORE
   A. True
   B. False

6. TRUE OR FALSE: MORTGAGE LENDERS PREFER YOUR DEBT-TO-INCOME BE 50 PERCENT OR LESS
   A. True
   B. False

7. WHEN SHOULD YOU START SAVING FOR RETIREMENT?
   A. When you graduate from college
   B. When your parents retire
   C. When you’ve paid off all your debt
   D. As soon as possible 

ANSWERS 

1. HOW MUCH MONEY SHOULD YOU HAVE SAVED IN AN EMERGENCY FUND?
   A. One to two months’ worth of expenses
   B. Three to six months’ worth
   C. One year’s worth
   D. Two years’ worth

   An emergency fund is exactly what it sounds like: a pool of savings that you have at the ready for a rainy day, and experts recommend saving three to six months’ worth of living expenses. While it may sound like a lot of money, having a savings cushion means being prepared for the unexpected, like if your job is affected. In some cases, it can also be used to fund something that’s unplanned  — for example if you chose to take a gap year this year.

2. WHICH TYPE(S) OF STUDENT LOANS ARE CURRENTLY ON PAUSE UNTIL 2021?
   A. Federal student loans
   B. Private student loans
   C. Both
   D. Neither

   Back in March, federal student loans were suspended without interest as part of the CARES Act, and the deadline has since been extended until Dec. 31, 2020. This means that you can pause your monthly payments and not be charged interest. (Note that you should continue making payments if you can, as the money will solely go toward your principal). If you have private student loans, reach out to your bank or lender to see what your options are.

3. TRUE OR FALSE: WHEN CREATING A DEBT-PAYDOWN PLAN, A GOOD RULE OF THUMB IS TO PRIORITIZE PAYING THE DEBTS WITH THE HIGHEST INTEREST RATE FIRST.
   A. True
   B. False

   When you have multiple sources of debt, whether it be student loans, credit card bills or car payments, it can be tricky to determine what to pay down first. A good rule of thumb? Focus your efforts on tackling the debt with the highest interest rate first (while also making sure to make the minimum payments on your other bills).

4. WHICH OF THE FOLLOWING ACTIONS CAN HELP YOU PAY DOWN CREDIT CARD DEBT?
   A. Negotiating a lower interest rate with your credit card company
   B. Automating your payments
   C. Transferring your balance to a card with a lower interest rate
   D. All of the above

   Because credit cards charge high interest rates, it’s a good idea to use every option you can to get rid of that debt as quickly as possible. Luckily, you have several options. The first step is to give your credit card company a call to see if you can negotiate a lower interest rate. You can also ask to be set up for automatic payments to ensure you don’t fall behind.

   You might also look into transferring your balance to a card that offers a lower interest rate — ideally one that has a 0 percent introductory rate and does not charge a balance transfer fee.  This will limit the amount of money you spend on interest and help you pay down your debt that much faster.

5. TRUE OR FALSE: CARRYING A BALANCE ON YOUR CREDIT CARD CAN HELP IMPROVE YOUR SCORE.
   A. True
   B. False

   Having a good credit score is important for when you need to take out a loan, as a better score can help you qualify for a better rate. One key to building good credit is to spend within your means. In fact, experts recommend that you keep your credit utilization ratio at 30 percent or less, meaning your monthly balance should not exceed 30 percent of your total credit limit. So if your card has a credit line of $10,000, your statement should not exceed $3,000. Keep your utilization down and pay your bill off in full each month, and you’ll be in good shape.

6. TRUE OR FALSE: MORTGAGE LENDERS PREFER YOUR DEBT-TO-INCOME BE 50 PERCENT OR LESS
   A. True
   B. False

   Your debt-to-income (DTI) is calculated by dividing how much money you owe by the amount of money you earn each month. So if your income is $5,000 a month and you put $2,000 toward your student loans and credit cards, you would divide 2,000 by 5,000 for a DTI of 0.4, or 40 percent. This number is particularly useful for mortgage lenders, who typically prefer your DTI be 36 percent or lower when deciding how much of a loan to give you.

7. WHEN SHOULD YOU START SAVING FOR RETIREMENT?
   A. When you graduate from college
   B. When your parents retire
   C. When you’ve paid off all your debt
   D. As soon as possible

   As a young adult, it can be hard to envision yourself in retirement. And you might not know how much to save — or even be able to set aside much now. But start saving, even if it’s a very small amount. That’s because of the magic of compound interest. Over time, that small amount of savings can grow to be a lot of money. So the sooner you start, the more time your money will have to grow into a nice nest egg. Your future self will thank you.