Financial wellbeing: Financial literacy quiz

When it comes to achieving financial wellbeing, financial literacy plays a fundamental ongoing role.

Financial literacy* has been defined as ’a combination of awareness, knowledge, skill, attitude and behaviours necessary to make sound financial decisions and ultimately achieve individual financial wellbeing’.

Further to this, financial wellbeing^ has been defined as ‘when a person is able to meet expenses and has some money left over, is in control of their finances and feels financially secure, now and in the future’.

With the above in mind, below is a short quiz to test your knowledge across the various personal finance areas—cash flow, debt, investments, superannuation, insurances, taxation, estate planning, and aged care.

You can find the answers to the questions located at the bottom of this article.

Financial literacy questions

Question 1 (Cashflow)

When forecasting future cash flow needs, it’s important to consider:       

1. Taxes.
2. Fees.
3. Changes to your personal situation.
4. Inflation.
5. All of the above.

Question 2 (Cashflow)

If your lifestyle costs are currently $45,000 per annum, assuming an inflation rate of 3% per annum, what would a similar lifestyle cost in 5 years?

1. $47,450.
2. $52,167.
3. $50,647.
4. $231,750.

Question 3 (Debt)

If you borrowed $80,000 to invest in a diversified investment portfolio and the total valuation of the investment portfolio is $130,000, what’s the loan to valuation ratio of the investment portfolio?

1. 61.5%.
2. 38%.
3. 162.5%.
4. 1.6 times.

Question 4 (Debt)

If you borrow to purchase an investment property for $300,000 and it’s leased for $200 per week (market rates). Is the interest on the loan deductible for tax purposes?

1. Depends on the interest rate of the loan.
2. No.
3. Depends on whether it’s residential or commercial.
4. Yes.

Question 5 (Investments)

What is diversification?

1. Where you spread your portfolio over a number of asset classes (and their sub-asset classes).
2. Where you have a share portfolio consisting of investments in a broad range of sectors, industries and geographical regions.
3. Where you have a number of managed funds that you invest into.
4. All of the above.

Question 6 (Investments)

If you invested $100,000 into shares returning 12%, $100,000 into cash returning 5%, $100,000 into fixed interest returning 6% and $100,000 into property returning 9%, what’s your total portfolio % return?

1. 8%.
2. 12%.
3. 7.5%.
4. 9%.

Question 7 (Superannuation)

A concessional contribution generally refers to a contribution that can be claimed as a tax deduction by the contributor. The annual concessional contributions cap for the current 2020-21 financial year is set at:

1. $300,000.
2. $100,000.
3. $35,000.
4. $25,000.

Question 8 (Superannuation)

The tax rate on earnings (income and capital gains) from assets supporting a retirement phase superannuation income stream (eg an account-based pension) is:             

1. 15%.
2. 10%.
3. 32%.
4. 0%.

Question 9 (Insurances)

Trauma insurance is used to provide protection for?

1. Loss of income whilst you are sick.           
2. An event such as a heart attack.
3. If you were to die.
4. If your business partner dies.

Question 10 (Insurances)

A waiting period for income protection insurance refers to:         

1. The time it takes for the claim to get accepted by the insurance company.
2. The length of time that the insured benefit will be paid to you.
3. The time you have to wait after a claim event occurs before you start receiving your insured benefit.
4. The time spent waiting for a specialist doctor.

Question 11 (Taxation)

Your employer is making concessional contributions to your superannuation fund. They are paying 9.5% of your income under the Superannuation Guarantee Levy. You earn $100,000 per annum. What is the tax rate applied in your superannuation fund on these concessional contributions?

1. 30%.
2. 15%.
3. 10%.
4. 0%.

Question 12 (Taxation)

Which of the following situations would not involve any assessable income being brought to account for taxation purposes for a taxpayer who works as an electrician?      

1. Selling their fridge and surfboard.
2. Selling their fridge and earning bank interest.
3. Earning bank interest and selling their surfboard.
4. Receiving a wage and selling their surfboard.

Question 13 (Estate planning)

If you pass away without a will (or with an invalid will), how will the distribution of your estate assets be determined:

1. Your eligible relatives can decide how to distribute.
2. By the rules of your superannuation fund.
3. It will always be paid to your children.   
4. It’s paid to your eligible relatives in a set order that varies for each state/territory in Australia, then the State (Crown).

Question 14 (Estate planning)

Which power of attorney continues to operate if you are in a coma?        

1. Enduring power of attorney.
2. General power of attorney.

Question 15 (Aged care)

What are two of the main types of Government-subsidised aged care services offered while you reside at home?

1. Commonwealth Home Support Programme and Home Care Package.
2. Age Pension and Home Care Package.
3. Commonwealth Home Support Programme and assistance from family.
4. Residential Care Programme and My Aged Care Support Package.

Question 16 (Aged care)

When thinking about an aged care service, it’s important to consider the following:          

1. The type of service and eligibility, how to organise the services and the cost to you.
2. Personal preferences, namely, to receive assistance whilst residing at home or within a residential aged care facility.
3. Seek professional advice from your financial adviser.
4. All of the above.

 Financial literacy answers

Question 1 (Cashflow)

The correct answer is E. All of the above influence future cash flow needs. For example: taxes and fees reduce the return on investment and the income you receive; changes to your personal situation may lead to reduced or increased cash flow needs; and, inflation increases the cost of living.

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Question 2 (Cashflow)

The correct answer is B. It’s calculated by 1.03 X 1.03 X 1.03 X 1.03 X 1.03 X 45000 (or 1.03^5 X 45000). Please note: If you answered C, you increased the lifestyle costs by 3% per annum to the start of the 5th year.

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Question 3 (Debt)

The correct answer is A. The loan to valuation ratio is the amount borrowed divided by total portfolio value. Therefore, the answer is $80,000/$130,000 = 61.5%.

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Question 4 (Debt)

The correct answer is D. If the property is an investment and it’s producing assessable income, then the interest cost of the loan to buy the property is likely to be deductible for tax purposes. However, it’s important to consider checking with your accountant to confirm deductions.

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Question 5 (Investments)

The correct answer is D. These are all examples of diversification. Diversification is the process of holding many assets to reduce your overall risk. You may diversify amongst a number of shares or properties. You may also diversify amongst the various asset classes (and their sub-asset classes).

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Question 6 (Investments)

The correct answer is A. The cash return on the investments are $12,000 for shares, $5,000 for cash, $6,000 for fixed interest and $9,000 for property—being a total of $32,000. The total portfolio value is $400,000, so the return is $32,000 divided by $400,000 times by 100, which is 8%.

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Question 7 (Superannuation)

The correct answer is D. Regardless of age, the annual concessional contributions cap is currently set at $25,000 for the 2020-21 financial year. Please note: The carry-forward provision allows you to carry forward unused concessional contributions cap amounts on a rolling basis for up to five previous financial years.

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Question 8 (Superannuation)

The correct answer is D. The tax rate on earnings (income and capital gains) from assets supporting an account-based pension is 0%. In comparison, the tax rate on earnings within accumulation phase is 15%.

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Question 9 (Insurances)

The correct answer is B. Trauma insurance aims to cover specific medical events, such as heart attack, stroke, and cancer. Upon a successful claim, trauma insurance provides a lump sum benefit payment, which could assist with, for example, debt reduction, lifestyle modification, medical expenses, and living expenses for a period.

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Question 10 (Insurances)

The correct answer is C. The waiting period is the length of time you have to wait from when you are unable to earn an income (due to a totally disabling, or partially disabling, sickness or injury) to when you would start to receive your ongoing monthly benefit payments. For example, a waiting period could be 30 days or two years.

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Question 11 (Taxation)

The correct answer is B. Upon receipt of a concessional contribution by a superannuation fund, a 15% contributions tax is deducted from the contribution. Please note: If you have income and concessional contributions totalling more than $250,000, an additional 15% contributions tax can apply on some or all of your concessional contributions.

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Question 12 (Taxation)

The correct answer is A. Selling a fridge is not taxable income if you do not carry on a business of selling fridges. Selling a surfboard is also not income, again if this is not your business. Earning interest and earning a wage are included as assessable income.

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Question 13 (Estate planning)

The correct answer is D. Passing away without a will (or with an invalid will) is called dying intestate. The main consequence of dying intestate is you don’t get to decide how your assets are distributed. Each state/territory government in Australia has established a procedure to follow if someone dies intestate.

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Question 14 (Estate planning)

The correct answer is A. An enduring power of attorney will still operate if you are in a coma. A general power of attorney only operates if you are of sound mind.

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Question 15 (Aged care)

The correct answer is A. The Commonwealth Home Support Programme provides you with a selection of entry-level aged care services. Whereas, the Home Care Package builds upon the entry-level aged care services offered by the Commonwealth Home Support Programme, by also providing higher-level aged care services.

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Question 16 (Aged care)

The correct answer is D. Aged care is an important stage in your life that requires careful and appropriate planning. It is vital to consider the options available and your personal preferences. And, understand how your decisions may affect your financial situation, goals and objectives.

If you would like to know more or to just receive some free easy to understand professional advice on all financial matters then please call 02 4349 4999 or email: [email protected]. It will be our pleasure to assist you and pass on over 30 years of financial consulting experience!                  

This article is published from our Hoddinott Consulting Newsletter.

*OECD (2020). OECD/INFE 2020 International Survey of Adult Financial Literacy.

^Muir, K., Hamilton, M., Noone, J.H., Marjolin, A, Salignac, F., & Saunders, P. (2017). Exploring Financial Wellbeing in the Australian Context. Centre for Social Impact & Social Policy Research Centre – University of New South Wales Sydney, for Financial Literacy Australia.