Financial Literacy Test: Part 1 – Episode 026

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[00:01] Welcome to the Prosperity Podcast, fresh alternative personal finance talk for independent thinkers who prosper outside of Wall Street. Here’s your host, best-selling author, Kim D.H. Butler and No BS Money Guy, Todd Strobel. Hey everybody, welcome to another edition of the Prosperity Podcast. This is No BS Money Guy, Todd Strobel. Once again, we have our resident financial expert, best-selling author, Kim Butler with us today. Hi, Kim. Hello, Todd. I’m so looking forward to today. I get to go back to high school? Yep. Oh my. I have, through my secret little sources, been able to come up with the financial literacy tests that have actually been designed to evaluate high school students to see whether

[00:51] they’re financially prepared to go out into the world. Now if we use the world itself as an evaluation point, we must assume that not a lot of people are doing well on the questions or perhaps the questions that we’re teaching them need changing. So I’m kind of excited to go through these, ask you these questions and maybe see if the issue isn’t so much the answers but the questions. Love it. Dan Sullivan always says two things that I just absolutely love. One is make your future bigger than your past. So I’ll happily go back to high school today, but I’ll make my future bigger than my past every day. And two, that questions are more valuable than answers. But we’re going to have fun today doing both, questions and answers.

[01:43] Super. Get me ready. All right. So our first section is called Financial Responsibility and Insurance. And each of these questions is multiple choice. So I’ll give you the question and then give you the answers and then we’ll go from there. So question number one says overall, which of the following is the best source of investment advice? Answer one would be the first result returned by search engines while searching on the internet under stock tips. Number two, an anonymous email. Number three, the financial section of the New York Times. Or number four, a discussion between financial advisors that you overheard while you were at the bank. Oh, can’t I answer none of the above? I told you the question problem might be the questions.

[02:40] Oh my gosh. So I’m going to have to go with number four, even though it was an overheard conversation. If you’re really going to force me, that’s better. That’s the lesser of the other three evils. Got it. So let’s just kind of, I mean, you know, we’ll dive into these just a little bit in that the first result returned on a search engine is always going to be something that somebody paid to put there. So you’re being sold something. Agree? Absolutely. And worthwhile to look at, but definitely not to make decisions on. And an anonymous email, that kind of speaks for itself. Yes. And what about the financial section of the New York Times? Why didn’t you choose that one? Well, I am not a believer that the media has our best interests at heart.

[03:31] And I know they’re supposed to be independent and all that, but I haven’t seen that to be the case in my entire life. So I am not a follower of media. And furthermore, I think the media, because they are so skewed, recommends things that are not best for us. And even more than that, if they do recommend it, it’s quote for the general American public and not for you as an individual. So I have no faith in the media. Got it. And that’s the exact same answer, I think, for number four, which is a discussion between financial advisors that you overheard while at your bank, because again, they’re talking about someone else’s finances, not even necessarily yours, right? Correct. And it’s a discussion.

[04:16] So it could be pros and cons. And when you overhear something, you know you’re only getting part of the story. All right. Well, question number two, which type of brokerage firms will likely provide the lowest cost of buying, selling, and owning shares of a public company? Answer number one is a small brokerage firm for high net worth individuals. Answer number two is a full service brokerage firm. And question number three is a discount brokerage firm. And those are my three choices. Those are your three choices. Well, we can go with the discount brokerage firm. Now, I think somebody could argue that the high net worth firm might charge a little less, but that’s completely irrelevant for high school students because they’re

[05:01] not going to be high net worth anyway. So discount brokerage firm it is. And the point I want to make is who says that the least cost is necessarily the best value. Got it. So somebody gave you a free stock tip in a company that went out of business six months later. Did you save money? Don’t think so. Again, I’m loving the questions, not so much the answers. All right. Question number three. If you bought shares in a mutual fund through a full service broker and the mutual fund lost 40% of its value, who will support the loss? You and answer one. You as the owner of the mutual fund shares to the mutual funds company as the decision maker is responsible for its investments. Three, the full service broker as the company that recommended the mutual fund

[05:59] purchase are for the FDIC who insured the full service broker. All right. Well, it is clearly question one, but they are answer one. They have an interesting word in their question and that is support. Support the loss. Well, you get to deal with the loss. I don’t know that you get to support it. Got it. So again, this this one, I actually almost kind of like the question because absolutely You have the mutual fund company and the full service broker providing you all of the advice and support that you want until you spend your money. And they’re also willing to fully accept their commissions. But when it comes to losses, who do those belong to? Yeah. Well, they have identified that part correctly.

[06:53] And then you have the laughable FDIC in there because of course, people should know that FDIC doesn’t mean anything to do with stock market accounts, not that they do know that. But again, back to our need for education in high schools. Got it. Okay. Question number four. In which of the following situations will you be less likely to be asked about your credit score? Huh? Okay. That’s an interesting question. Answer one. You purchase a car with no financing. Question two. You apply for a job or quite our answer three. You apply for a credit card and the question is least likely to be asked about your credit score. Correct. Oh, well, I’m going to have to go with job because credit card and cars are clearly

[07:44] going to have credit scores. But I think in today’s world, most jobs ask for credit scores also, which I was surprised that employers were able to do that, but I hear that they are pretty regularly. Got it. And you may not have heard me clearly read the answer to it. You purchase a car with no financing. Ah, okay. You’re right. So it is probably that one. You pay cash. I don’t know that they’d have a reason to check your credit. Correct. Although when you apply for your car insurance, they’re going to look at your credit score again. There you go. So understanding the importance of credit score is important for our listeners to understand because homeowners insurance, car insurance and jobs are looking at your

[08:26] credit. So that is important. Absolutely. Question number five. If each of the following persons had the same amount of take-home pay, who would need the greatest amount of life insurance? Okay, so now you’re really getting me going because they’re asking who needs the most And needs analysis is a completely inappropriate way to figure out how much life insurance you should want or you should have. So this is as crazy as saying, well, I’ve got a $50,000 car, but I really only need a $20,000 car. So I’m going to ensure my $50,000 car for only $20,000 because if I lose my $50,000 car, I’ll just replace it with a $20,000. That’s crazy. And yet that’s what needs analysis suggests, but I can adopt my age old training on needs

[09:42] analysis around life insurance and identify that it’s the guy with the younger kids, plural because I think one of them had young child and one of them had two kids. Dan was a single man with one young child and then Mike was a retired man with two adult children. Oh, okay. So I am going to go with the Dan with the single and the younger child because clearly that’s the greater quote need even though what we prefer to look at is something called human life value where the person is worth a particular amount based on income or net worth and the insurance company gives them about 15 times their income. And so this is interesting, if you took those same four gentlemen and ran them up and insurance companies flagpole using human life value approach and the question said

[10:35] that they had the same net home net take home pay, they could get the same amount of life insurance. All four of them, even the single guy, even the retired guy, irrelevant of how many children they have. They get the exact same amount of life insurance. Got it. And I think the question that I want you to address is, is that it mentions that all four of them have the same cash flow situation. And if you were in a cash flow situation looking to save some of that cash flow and stay ahead of inflation, wouldn’t that be an insurance question as well? Absolutely. Of course, the insurance companies don’t necessarily train that way. And that’s, again, where the needs analysis has gotten people off track as to what

[11:22] they’re insuring and what insurance is designed to do is indemnify or replace somebody’s income cash flow. And so it really doesn’t matter all of those other areas of how old they are or whether they have children or not. And even a single guy can take advantage of life insurance if he knows what he’s doing. Got it. This is your first time listening to the Prosperity Podcast. Look at some of the others and you’ll see how excited we are about the living benefits of life insurance as well as the death benefit. We also invite you to go to Partners, the number four, Prosperity.com. And Kim, did you have something you wanted to give away today? Absolutely. At Partners for Prosperity.com, we have a Prosperity Accelerator Pack that you

[12:11] can sign up for. So Partners for Prosperity.com, that’s the number four. On the right-hand side, Prosperity Accelerator Pack has a whole bunch of goodies. Super. All right. Well, now question number six. If your car was damaged in a flood, which type of automobile insurance would typically cover the damage to your car? A, universal, B, term, C, liability, or D, comprehensive? Well, it’s D, comprehensive. It cracks me up. We’ve got the life insurance words as question one and two or answer one and two. And then, of course, the liability coverage, which is number three, is for only if something happens that isn’t physical damage. It’s comprehensive insurance. That’s what’s going to cover the loss of the car.

[13:02] Got it. All right. Well, let’s jump real quick into the credit card and debt section. This looks like a fun one, too, eh? Are you enjoying this so far? I love it. All right. Question one. Which of the following credit cards makes sense for a person that pays his balance every month? A credit card with a 5% fixed interest rate, a credit card with a 0% interest rate for the first six months, or a credit card that offers 1% cash back rewards on all purchases? I’m going to go with number three, which is cash back rewards on purchases because the interest rates are not really relevant if they’re making their payments every single month. But we’ve seen clients that make their payments every single month and

[13:50] then all of a sudden they have something happen to them where they can’t. So it is important to pay attention to the interest rate on your credit cards, even though you’re never going to intend to use it. And so I like the cash back deal works for me. Perfect. Great answer there. Only word of caution I would give to your high school students is know that there’s two rates on every credit card. There’s the regular rate and then there’s the default rate. And usually one day late is enough to earn you the default rate, which can often double. Am I correct in that? Absolutely. Yep. We’ve seen those in the high 20s in terms of the default rate that people have to pay. And one other thing to be aware of is that a lot of times a credit

[14:35] card will offer some kind of special deal, but you only get that special deal for a particular kind of purchase and you have to pay off all the other purchases in order to get to the special deal so that there’s definitely some tricks in the credit card industry that we’ll have to continue to do some work on. Got it. All right. Well, Yolanda has three credit cards and she owes five hundred dollars on each of them. The interest rates are seven percent for card a nine percent for card B and eight percent for card C. If Yolanda has one thousand dollars to pay some of her debt, which cards should she pay if she wants to minimize future interest payments? So it would do you want to just answer the question or I’m

[15:23] going to give you the four possible answers. I’ll answer the question. It’s the highest interest rate one because they’re clarifying. And that’s a really important distinction. They’re clarifying that they’re wanting to reduce interest payments. So that’s clearly the card with the highest interest. Got it. So just just to clarify, if the answer, if you had enough money to pay part of a higher interest credit card or all of a lower interest credit card, what would your answer be part of a higher interest credit card, assuming everything else is equal because there’s a lot of moving parts there that I would want to dig in on a little bit more. But I think that is a mistake that a lot of people

[16:09] make is they they want to try to get something paid off, but they don’t realize it’s the highest interest rate card that’s technically costing them the most interest. I mean, that seems like it should be logical, but I think those balances play with people’s minds and they view a larger debt as worse than a higher interest cost. Got it. All right. Question number three, which of the following terms is not typically associated with borrowing a credit card, B mortgage, C debit card or D auto loan? That would be C debit card because technically a debit card doesn’t borrow in any form. It just withdraws money out of a checking account. But that’s a good question. I bet a lot of high schoolers wouldn’t know that.

[16:56] Got it. All right. Question number four, which of the following actions typically charges the most credit score of a person? Which of which of the following actions are which of the fine actions typically changes the most credit score of a person? Here we go. A credit card was a credit card. A credit account was opened. Choice A, 50% loss in the stock market for a particular stock. B, or the minimum payment of a credit card was not paid for three months in a row. C. It’s clearly C, although A would also have an impact, but not as big of an impact. And of course, B wouldn’t have an impact at all. Your credit score does not care what you’re doing in the stock market. Got it. Tough question to read.

[17:50] All right. Last question. Question number five, Hillary and Stephanie have both borrowed $15,000 from the same bank to buy the same model of new car. Hillary’s score is 732 and Stephanie’s credit score is 588. Who is likely to pay a lower finance charge? And the answers are A, they will both pay the same. B, Hillary, C, Stephanie, or D, they will pay the same because they bought the same type of car. It’s definitely Hillary because the higher credit score is going to give you a lower finance charge or a lower interest rate on your car loan, without a doubt. Got it. And as far as our high school students listening, you don’t always have to take the financing at the dealership. You can also bring your own financing with you.

[18:48] Any comments on that, Kim? Absolutely. We do a lot of work around helping people realize that the 0% financing that the dealerships offer is not usually a true 0% cost because what those dealerships do and furniture stores are guilty of doing this as well. And I actually just heard an ad for a dentist for implants the other day. Oh, we offer no interest financing. No, they don’t. They add the interest to the price of whatever it is. So your $5,000 couch is actually $5,500 because they added 500 bucks of interest. I have no idea how much implants cost, but they just add the interest to the cost. Your $20,000 car is actually $25,000 because they add the interest and then they tell you it’s a $25,000 car.

[19:36] So there are occasions like 2008 when we had a very, very distraught economy in our country that dealerships truly were offering 0%, but not often. And you have to ask them, what is the cash price of the car in order to figure out whether they’re truly offering a 0% deal or not. Super. Well, we do have actually three more tests to take, but I think we should probably stop here and do going back to high school part two. What do you think? Sounds good to me. So thanks for the trip to the past. And I hope that this has been helpful. We love to help high school students learn the whole truth about their money. And we’ve got some information about the 0%. If people have further questions about that, they should definitely reach

[20:26] out to us on the website. That’s partners. Number four, prosperity.com. And we will help with any car financing purchase questions that go along with what we covered here today. Got it. Once again, this is no BS money guy, Todd Strobel for the prosperity podcast, inviting you to check back in to financial and financial literacy for high school students part two. Take care of everybody. Thank you for listening to the prosperity podcast to take control of your money and have it work for you. Visit us at partners for prosperity.com. If you liked this episode, make sure you subscribe and leave a review.