What’s your financial IQ? Game-night edition

Are you ready to ace trivia night? Prep with this seven-question quiz that will give you a wealth of knowledge on everything from income and debt to savings and retirement.

Before you challenge your friends to a battle of (financial literacy) wits, study up on common economic lingo, best money practices and winning budgeting strategies. Get ready to roll the dice – you’re about to gain a wealth of knowledge.

1. What’s the difference between gross and net income?

On your paystub, you’ve likely noticed two different numbers: your salary (or wages for hourly workers) and your take-home pay. The first is referred to as gross income, or the total amount you’re paid by your employer. The latter is net income – i.e., your salary or wages minus any required or voluntary deductions. (Think: taxes, retirement account contributions and health insurance, for example.)

2. What is credit utilization ratio?

Do you have any revolving credit? Meaning, credit that renews as the debt is paid off, such is the case with a credit card. Then you have a credit utilization ratio. This number, expressed as a percentage, is calculated by taking the amount of credit you’re currently utilizing divided by your total available credit.

3. True or False: All debt is bad?

False. Debt often gets a less-than-stellar reputation, but not all borrowed dollars are bad news. When it comes to funding larger items (college tuition or your first home), paying with cash is usually not an option.

If you’re unsure whether something falls into the “good debt” or “bad debt” category, ask yourself: Will this purchase help me reach my financial goals, or keep me from them? That should give you your answer.

4. What factors determine your credit score?

As you probably know, your credit score is a key tool in your financial kit. The higher your score – ranging from 300 to 850 – the more likely you’ll be approved for lines of credit and favorable interest rates. But do you know which factors are taken into consideration when determining your creditworthiness? Take a look:

• Payment history – 35 percent of score: Creditors want to know you’ll make your payments on time.
• Amount of debt – 30 percent: Remember credit utilization ratio? This is how much it impacts your score.
• Age of credit – 15 percent: The longer you’ve had a line of credit (aka the “older” it is), the higher your score will be.
• Types of credit – 10 percent: Having both revolving lines of credit (credit cards) and installment loans (car, student or personal loans) in your name proves you can handle all types of credit, improving your score.
• Number of credit inquiries – 10 percent: Multiple credit checks by potential creditors in a short period can result in a hit to your score. Don’t apply for a bunch of lines of credit at the same time.

5. What are the “snowball” and “avalanche” approaches to paying off debt?

Both strategies start with the idea of making the minimum monthly payment on all of your debts. Then, special attention is given to a “focus” debt – the one you’re focusing most effort and money to pay off.

With the snowball approach, your focus debt goes in order from smallest amount to largest amount, regardless of interest rate.

In the avalanche approach, however, you start with the debt that has the highest interest rate. From there, you work your way down to the debt with the lowest interest rate, no matter the balance.

6. What is the 4 percent rule?

Once you enter retirement, you want to ensure you’ll have enough money to last the rest of your life.

Enter the 4 percent rule, a guideline that suggests retirees only withdraw 4 percent of their retirement savings in the first year you retire. Then, you can continue to withdraw the same amount, adjusted for inflation. According to experts, it’s safe to assume you won’t outlive your money at this rate. Withdrawals will primarily be made up of interest earned and dividends.

7. What is the Balanced Money Formula? 

Developed by U.S. Senator Elizabeth Warren and her daughter Amelia Warren Tyagi, the Balanced Money Formula is a rule of thumb for allocating income.

Following the formula, 50 percent of your paycheck should go toward needs like housing, groceries and health care; 30 percent should be used for wants like cable and dining out; and 20 percent should be contributed to debt repayment and savings.

Whether you won game night or came in last place, we’re here to help you navigate your finances. Make an appointment with a banker today.