Are you socking enough away for rainy days, college, retirement? MONEY SAVVY

January 07, 1994|By Deborah Lohse | Deborah Lohse,Contributing Writer

How would you rate yourself as a money manager?

Are you making the best financial decisions for your family -- or is there room for improvement?

Do you have a sound savings plan for college and retirement -- or could you come up short?

To find out, answer these questions on the key money issues most two-paycheck families face. Then compare your answers with those given by experts.

Give yourself one point for each correct response, then see how you fare.

You'll know if you're a financial whiz or if you need to do things differently to make the most of your money today to guarantee your future security tomorrow.

1. In order to send a child to a private college 16 years from now, what is the minimum amount you should invest each month?

A. $50

B. $150

C. $250

D. $500

2. If you are married, have two children under age 10 and you and your spouse each earn $30,000 a year, how much life insurance do you need?

A. $30,000

B. $90,000

C. $150,000

D. $300,000

3. When you retire, what percentage of your annual income will come from Social Security if you are now 35 and expect to make about $50,000 a year for most of your working life?

A. 100 percent

B. 50 percent

C. 25 percent

D. 10 percent

4. What percentage of your retirement savings held in a 401(k) plan, Individual Retirement Account or Keogh account should be invested in growth stocks if you have 30 years before reaching retirement?

A. 25 percent

B. 50 percent

C. 75 percent

D. 90 percent

5. What's the best way to reduce taxes if you're in the 28 percent bracket?

A. Put the maximum amount possible in your company's 401(k) plan each year.

B. Buy tax-free municipal bonds.

C. Increase your charitable contributions.

D. Instead of filing a joint tax return with your spouse, change your status to "married filing separately."

6. When picking a mutual fund, which of the following is most important?

A. Current yield

B. Whether or not the fund charges a load (sales fee or commission)

C. The fund's 10-year track record

D. Low expense ratio

7. How much interest would you save by paying an extra $100 a month on a $75,000 30-year mortgage financed at 8.5 percent?

A. $5,000

B. $10,000

C. $25,000

D. $60,000

8. If you're in the 28 percent tax bracket and you put $5,000 a year in your company's tax-favored flexible-spending account to pay child-care expenses, how much will you save in taxes?

A. $504

B. $1,400

C. $1,783

D. $0

9. If you refinance the $150,000 balance on your mortgage and lower the interest rate from 10 percent to 8 percent, how much interest will you save over three decades?

A. $5,500

B. $15,000

C. $78,000

D. $110,000

10. What's the best financial move to make if your household income is $50,000, you have a $15,000 emergency fund in a savings account, $10,000 in a 401(k) plan and a $5,000 balance on an 18 percent interest credit card?

A. Pay off the credit card from your emergency fund, replenishing the $5,000 as quickly as possible.

B. Transfer the $5,000 balance to a card charging 15 percent or less.

C. Take a loan against your 401(k) plan and use the money to pay off the card.

D. Leave your emergency fund and 401(k) plan intact and try to pay more than the minimum amount due on the credit card each month.

ANSWERS

1. D. To pay tuition, room, board and other fees for a private college beginning in 2009, you would have to put away more than $500 a month in an investment earning about 9.5 percent a year, says Ray Loewe, the president of Educational Planning Systems in Marlton, N.J.

That's because college expenses have been rising by more than 7.5 percent a year. The price tag for four years at a private college could come to $252,600 by the time today's toddlers get there.

The projected cost for four years at a state school: $128,400, requiring you to sock away $263 a month.

"Most parents can't afford to save those amounts," Mr. Loewe says. But anything you save now will lower what you must borrow in the future."

2: C. As a quick rule of thumb, you should have life insurance equal to five times your annual salary if you have two or more young children and bring in about half of your family's income.

Insurance advisers recommend term insurance, which you renew each year for as little as 1/10th the cost of more expensive forms of insurance such as cash value or whole life.

3: C. If you hope to maintain a $50,000 annual income when you retire, Social Security will provide only about 25 percent of your cash flow. The rest will have to come from your employer's retirement plan and your own savings.

4: C. At least 75 percent of your retirement savings should be invested in growth stocks, says Paul B. Brown, the co-author of "Grow Rich Slowly: The Merrill Lynch Guide to Retirement Planning" (Viking, 1993).

Over the long haul, stocks not only tend to beat inflation, they generally outperform other investments such as money-market funds, bonds and guaranteed investment contracts (GICs).

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