Could You Pass This Financial Quiz? – Episode 203

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[00:03] Welcome to the Prosperity Podcast, fresh alternative personal finance talk for independent thinkers who prosper outside of Wall Street. Here’s your hosts, best-selling author, Kim D.H. Butler and No BS Money Guy, Todd Strobel. Hey everybody, welcome back to the Prosperity Podcast. This is No BS Money Guy, Todd Strobel. Once again, we have best-selling financial author, Kim Butler, and our co-host today. And today, Kim is going to be taking a test, or a quiz, I guess, if you will, on financial literacy and kind of evaluating the quiz. This quiz is available on the website FINRA, that’s F as in Frank I N R A dot org. If you want to go in there and test yourself, just kind of a warm-up. We have another podcast that will be coming out at about the same time as this one

[01:02] that discusses a big chunk of the survey and the data they were able to take from it. But Kim is excited to take this, and I haven’t taken it either, so this will be a new experience for us all. Awesome, and we’re not concerned if we fail. Suppose you have $100 in a savings account earning 2% interest a year. After five years, how much would you have? Now, here’s, you know, obviously you would almost need a financial calculator to completely answer the question. So the answers are more than $102, exactly $102, less than $102, or I have no idea. Good heavens. Well, it’s more than $102 because this is an example of compounding interest. You’re going to have interest added to your principal, and the next year you’re going

[02:01] to earn that same interest rate on the larger balance, and then the next year you’re going to increase the balance again and earn interest on that, et cetera, et cetera. And you’re absolutely right. You have to have a financial calculator that has a future value function in it to get the answer. I don’t think you could accurately do that on a regular handheld calculator. All right. And while we’re mentioning calculators, take a moment to tell us about the calculators that you and Todd use. Absolutely. So there’s even a free app that anybody can get on the Truth Concepts site. You don’t have to go to the site. You can just go to your app store. However, right now it’s only available on Android, but we’ve got an iPhone app

[02:48] coming super shortly. And this will be a financial calculator that has financial functions in it like future value, present value, time, interest rates, and then payments. And it’s funny, I was just talking to my sister the other day. She’s thinking about getting into another car, and she said I had to get online and get a car payment. And I said, oh, tell me the facts. I wanted to test it on Todd’s Truth Concepts calculator, because I trust it more than I would trust something she found on the web. And thankfully, the information was exactly correct. But you cannot calculate things like that on a handheld calculator. You have to have a financial calculator. So the best one known amongst people in the industry is an HP12C.

[03:36] There’s a Texas Instrument financial calculator that’s fairly popular with kids at school as well. And of course, as my sister did, you can jump on the web and get some of these financial calculations done on various websites that have them available. And the calculations, again, are made with a financial calculator. Super. Well, let’s go to question two. Imagine that the interest rate on your savings account is one percent a year and inflation is two percent a year. After one year, would the money in the account buy more than it does today, exactly Awesome. I’m impressed with these questions. And the answer is yes, because inflation is outpacing the growth on the account. And that is a very good financial literacy thing to know.

[04:29] And not everybody does. So I’m happy with this so far. So the official answer would be you can buy less. That’s correct. If interest rates rise, what will typically happen to bond prices? Fall, stay the same, or there is no relationship. They will fall. And that also is a very good question and one that can be memorized. I know I had to memorize it in econ or accounting or whenever we first learned this kind of information. I’m not sure that people totally understand it after they’ve memorized the answer. But absolutely. Well, just to make the statement, interest rates and bond prices are, I’m not sure what the proper word is. Inverse. Thank you. When one goes up, the other goes down. And when one goes down, the other goes up.

[05:22] Well, the easiest way for me to remember it is that, you know, if you if there’s a bond that’s paying one percent and next year there’s a bond that’s paying five percent in order to have those bonds have the same value in the marketplace, we have to discount the one percent bond so that it has the equivalent rate of return of the five percent. Correct. Well said. True or false? A 15 year mortgage typically requires higher monthly payments than a 30 year mortgage. But the total interest over the life of the loan will be less. True, false or don’t know? How interesting. So the answer is true. But that is only part of the story. Now, I’ll get off my soapbox. But that is a fabulous question. And of course, most people may know that the answer is true,

[06:26] but they’re probably not going to know the second half of the story, which for our listeners, they may. And just a quick reminder, in case you don’t, a 15 year mortgage, though you pay less interest, you actually have higher cost because you lose your tax deduction and you have more money tied up in that asset. And so the actual net, net, net cost is higher on a 15 year mortgage than it is on a 30 year mortgage. But it’s very rare to find that fact with that second half of the story anywhere in mainstream press. And in case you’re new, one of our new listeners, we’ve got a gift for them, don’t we? We do. And it addresses this a little bit. And it is called financial planning has failed. And that’s because financial planning recommends 15 year mortgages.

[07:20] And it is available at partners number four, Prosperity dot com slash ebook. And there’s an audio version of a bunch of information that talks about typical financial planning and how it has failed our society. You’re ready for the next one. Yes. True or false? Buying a single company stock usually provides a safer return than a stock mutual fund. A safer return. I almost want to call that a trick question. State it again. So I’m really buying a single company stock. They’re trying to preach diversification. Buying a single company stock usually provides a safer return than a stock mutual fund doesn’t say higher. It’s just I mean. I think the point they’re trying to make is, is that if you have a sample

[08:27] size of a thousand versus a sample size of one, you’re able to have a higher rate of predictability. Yeah. So I’m going to go with false because we wouldn’t say that a single company stock is safer than a stock mutual fund. But I don’t like that word applied to stock market at all. The word safe. So we’ll we’ll just let that go. I got it. Got to agree. I got to got to agree. But I mean, I think I understand the question that they’re asking. But unfortunately, that’s it’s almost back to assuming the same thing, that these are the only two investments that you have. Right. A single share of stock or a mutual fund. Our mission has been to educate about investments that are safer and have a potential for a higher rate of return than either of those. Correct.

[09:22] Absolutely. Much safer. And with potential higher rate of return and not locked in to roller coaster riding. But yeah, we’ll let that one go. All right. We’re on to this is the bonus question. Suppose you owe one thousand dollars on a loan and the interest rate you are charged is 20 percent per year compounded annually. If you didn’t pay anything off at this interest rate, how many years would it take for the amount you owe to double? That would be less than two years, two to four years, five to nine years, ten or more years or don’t know. Hmm. All right. So I would need the facts again to answer the question because one thousand dollars. Mm hmm. Twenty percent interest rate compounded annually.

[10:20] Mm hmm. You’re not making any payments. So it’s at a 20 percent rate of return. How long does it take to double a thousand to two thousand? I need a calculator for that. I have no idea. Wasn’t that the rule of seventy twos or something like that? Well, I mean, you can kind of back into it with that, I think. I would think so. And because we’re used to using rule of seventy two more for investment calculations, I get confused when we try to apply it to debt. But and you you may know it better than I do. I have to admit, it’s not everyone that’s stuck in my head very well. Tell our listeners what it is. I’m going to take a guess here that if we I’m going to say it’s two to four years. OK. Do we get an answer or do we not know till we push the button?

[11:18] We don’t know till the end. All right. And we’re going to go with that. I think it would be right about three years is how long it would take to double your I think anyway. You’re set. We’ll see. You got six correct answers out of six. Yay. OK. This is good. But you helped me with one of them. And so does that mean we’re financially literate? As literate as you can get in six questions. Which that’s scary in and of itself. But we’ll just go with being grateful. And maybe this will help our listeners feel confident that we know what we’re talking about. But I think the reason that we’re confident and knowing what we talk about is because everything that we talk about is so literally either guaranteed in nature or assured in nature.

[12:18] And so unlike most financial people, we can prove what we need to prove with the truth concept calculators if something needs to be proved, like the fact that a 15 year mortgage is more expensive than a 30 year mortgage, which, by the way, if anybody needs proof of that, they’re welcome to grab the book Busting Interest Rate Lies that covers the mortgage thoroughly. If you’re not a book reader, of course, there’s an audio version of that book as well. And you want a video of that proof, please email us at hello at partners number four prosperity dot com. And in the subject line, put proof of mortgage. And we will happily send you a 20 minute video that proves that a 15 year mortgage is more expensive than a 30 year mortgage.

[13:09] Back to the other. I don’t know. We’ll just have to think about that one a little bit. Super. Now, this is the book that you recommend getting the physical book, correct? Not so much the audio. Very true. There are a lot of calculators. And so if by chance you’ve bought the audio, if you’ll email me again, hello at partners number four prosperity dot com. I’ll send you a PDF of it so that you can see the calculators because the audio is not going to make as much sense without the calculators proving the difference on those mortgage costs. I tried to verbalize them the best that I could, but it shows much better than it tells. Awesome. Well, again, this was at finra dot org is where we took this

[13:52] survey today. If anybody else wants to give it a shot also would like your opinions or any quizzes or tests or anything that you find out there that you found useful or maybe you didn’t find so useful. And we’ll be glad to review those as well. Again, special thanks to all of our listeners. And thanks to Kim Butler for giving us such great advice. Kim, anything you want to add for we leave today? Well, I was going to try to calculate quickly that a thousand dollar 20 percent thing. But the fast calculator that I grabbed, of course, is an amortization schedule, which makes loans go down, not up. So we’re going to have to do part two on that one. OK, well, we got it right. So that’s the main thing.

[14:34] So anyway, this is no BS money guy for the Prosperity podcast saying, take care, 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 dot com. If you liked this episode, make sure you subscribe and leave a review. I founded Ornot in 2013. We made a clothing store for cyclists. For me, the best part of Shopify is the possibility of managing the business even without technical knowledge. We can manage everything from back end to front end and make online sales without complications. If Shopify was a cycling equipment, I would say it would be the bike itself. That’s what allows us to get where we want.

[15:25] It is in Shopify that we manage our business. Start your free evaluation at Shopify.com.