1. You have $15,000 in credit card debt. You could pay it off by emptying your three-month emergency savings cushion. What do you do?A. Pay it all off now.
B. Accumulate an additional $15,000, and then pay it off.
C. Trim it by half with your savings cushion, then put every extra dollar towards the payoff as it comes in.
Answer: A. “Stop wasting your money on interest,” says certified financial planner Phil Dyer. What if there’s an emergency? Put those expenses on a credit card, says Dyer. And look for one with a low six-month introductory rate.
2. You bought $10,000 in shares of Bonanza Biosciences. The stock is down 50 per cent, and its promising cancer drug is years away. What do you do?A. Hold out for big profits. You can’t expect a cure for cancer overnight, after all.
B. Invest another $5K to lower your cost basis.
C. Sell immediately.
Answer: C. Investors have a tendency to throw good money after bad. Behavioural economists call this the “sunk-cost fallacy”. But the goal of investing is not to save face; it’s to earn money. So base your decisions on where a stock can go, not on where it came from.
Related: Beat your worst financial habits
3. Brian keeps all his money in bonds. Mark prefers a mix of bonds and domestic and international shares. Which is the likely result?A. Brian can expect lower returns over time, but at lower risk.
B. Brian can expect lower returns, but at greater risk.
C. Brian can expect lower returns, but at equal risk.
Answer: B. Yes, bonds are less volatile than stocks in the short run. But each asset class reacts differently to economic events. Holding a diversified portfolio for five years or more is actually the safest bet.
4. You’ve found a great house and qualified for a mortgage. But there’s a 50-50 chance that your company will be relocating you within three years. What should you do?A. Buy it and sell later if you have to.
B. Buy it, but with an adjustable-rate mortgage.
C. Continue renting.
Answer: C. “Don’t buy a house unless you’re reasonably sure you can stay for 4-5 years,” says Dyer. You could lose money in selling costs, moving expenses, agent commissions, repairs and even property value if the market is soft.
How old are you?
2. A = 0 B = 1 C = 2
3. A = 0 B = 2 C = 1
4. A = 1 B = 0 C = 2
6-8 points: wizened sage. Nice job; you’re living rich – and you’re going to retire even richer.
3-5 points: young and impressionable. You know the fundamentals but aren’t practising them.0-2 points: juvenile delinquent. You’re wasting money you didn’t even know you had.