The ANZ recently released the results from its yearly “Financial Literacy Survey”. This looks at how much Australians know about their finances…

The results were like looking at the school report of a troubled teenager: “Much improved. Could do better. Would help if the student did some homework once in a while.”

Even if you slept through economics at school, you now have the chance to do a free refresher course. In the next 18 months we’ll all be going through a (real world) economics exam – get it wrong and the ramifications will be much worse than a scolding from your mum.

See below to take the test yourself

Questions:
1. After four years of reading the Barefoot Investor column and listening to me bang on about the dangers of debt, you finally decide to do something about it. The quickest way to achieve this is:

(a) By negotiating a lower rate on your debts, and increasing your repayments.

(b) By getting a line of credit – set up by a friendly telemarketer who called while you were watching Today Tonight.

(c) By cutting up your credit cards.

2. On reaching university you take up a student banking package that includes a credit card with a small, manageable limit. As long as you’re responsible and pay it off each month, will this aid in establishing a positive credit record down the track?

(a) Yes.

(b) No.

3. You see an ad in the paper for a home loan offering an attractive rate of 9 per cent. Next to the figure is the “comparison rate” of 9.75 per cent. The comparison rate means:

(a) The average rate of comparable home loans currently on offer in the market.

(b) The true interest rate you’ll pay after the ongoing and establishment fees are factored in.

(c) The interest rate you’ll pay if you choose to fix your rate.

4. The unthinkable happens and your bank goes belly up. Is the money in your account insured against loss?

(a) Yes.

(b) No.

5. The Reserve Bank has just lowered official interest rates by 1 per cent. This was designed to:

(a) Make sure property continues to double in value every seven years.

(b) Make sure the banks remain profitable.

(c) Stimulate the economy in light of the global economic slowdown.

6. You slap on the gold watch, sandals and socks, and point the Commodore to the Gold Coast. The $300,000 you’ve accumulated in superannuation will provide you with roughly how much income per year in retirement?

(a) $34,000.

(b) $24,000.

(c) $18,000.

7. As an investor there are only two things within your control that ultimately determine the bulk of your investment returns. They are:

(a) The asset class you choose to invest in, and the fees you pay.

(b) The fund manager you choose, and their track record.

(c) The movement of the share market, and your trading strategy.

8. You decide to set up a nest egg (earning 8.5 per cent) for your soon-to-be-born baby, kicking it off with $5000 and regularly investing $100 a month. After 18 years you’ve contributed $26,600, but what’s the total value of your investment?

(a) $73,700.

(b) $51,820.

(c) $37,850.

9. You buy a gas-guzzling six-cylinder Ford Falcon so you can tailgate Toyota Prius owners in suburban shopping centres. Taking everything into account (financing, depreciation, servicing, rego, insurance, fuel, tyres), how much does it cost a week to run?

(a) $175.95.

(b) $242.47.

(c) $309.45.

10. Your father tells you he bought his first car for about the same money you dropped on a three-day bender in Adelaide. With inflation driving prices up around 3 per cent a year, how long will it take for prices to double?

(a) 12 years.

(b) 14 years.

(c) 24 years.

11. You’re adviser calls and suggests you need to diversify, given that your share portfolio consists of Adultshop.com (last trade $0.008) and Amazing Loans (currently suspended for failing to lodge their accounts). To be a fully diversified investor you’ll need to:

(a) Invest in shares from a range of industries and sectors.

(b) Invest in both local and international shares.

(c) Invest across a range of different assets.

12. Your brother Phil, a nail beautician by trade, tells you about a hot investment tip he overheard at the salon. After you do some research, you see that it’s advertised as having a return well above market rate, and no risk. You decide to:

(a) Invest lightly and see how it goes.

(b) Consider it too good to be true and not invest.

(c) Invest heavily and maximise your return.

Answers
1 A. If anyone calls you while you’re watching Anna Coren, hang up on them.

2 B. Don’t fall for that old bankers’ tale.

3 B. But remember: while comparison rates are helpful, they don’t include the exit fees the banks hit you with.

4 B. But political pressure may change this.

5 C. And economists are predicting we may see some more stimulation this year.

6 B. Home brand dogfood will do.

7 A. Mention this to the next financial salesperson who tries to pitch you.

8 A. Teaching your child first hand the power of compound interest is probably the best thing you can do for them.

9 B. The Prius will give you better fuel economy – just don’t expect to drag anyone off at the lights.

10 C. Just use the “rule of 72″; 72 divided by 3 (the interest rate) gives you 24 years. This works for any financial calculation.

11 C. Warren Buffett says diversification if for wimps. But he’s smarter than you (and me), so play it safe and spread your eggs.

12 B. The ANZ survey asked a similar question and found that over half of respondents were prepared to risk their cash. Perhaps that explains why the ABS found that Australians lost nearly $1 billion last year to frauds and scams (although at that rate we’re still $729 billion ahead of the Wizards of Wall Street).

How did you go?
(0-3) Congratulations! You’ve won an all-expenses-paid holiday to the Gold Coast, where you’ll be among a select few investors to learn about an exciting investment strategy called Time Share Accommodation.

(4-6) I’m not going to beat around the bush – your score ranks you below average. The only people in finance who get away with being consistently below average are fund managers. They trouser billions a year in fees that come from the retirement balances of people like you.

(6-9) Solid performance. One suggestion: if you’re into retail managed funds, take a look at Australian Foundation Investment Company (ASX: AFI) and Argo Investments (ASX: ARG), noting their historical returns and the fees they charge (see question 7).

(9-12) Hey I’m impressed – you scored a higher mark than me when I did a second read through of the questions!

Tread your own path!