Take this investing IQ quiz to find out just how much you know about investing your money in everything from 401(k)s to ETFs.
Get investment advice (including videos) after every question.
At the end of the quiz, you’ll find out if you should stick to letting someone else manage your investments, or if you’re ready to start buying and selling stocks, bonds and other investments on your own.
1. There’s a key difference between saving money and investing it. Savings allow you to access money quickly when you need it, and may earn a small rate of return. Money you invest can sometimes be accessed if you need it before a certain date, but there are often fees involved with doing so. Investments, however, yield larger returns on your deposits. There’s also risk involved — good investments can make you wealthier, but poor investment choices (and market fluctuations) can result in a loss of money.
Which of the following is a type of investment, not a savings vehicle?
a. Money Market Account
c. Certificate of Deposit
An ETF, or exchange traded fund, is a type of investment.According to the Nasdaq, ETFs “are funds that track indexes like the NASDAQ-100 Index, S&P 500, Dow Jones, etc. When you buy shares of an ETF, you are buying shares of a portfolio that tracks the yield and return of its native index. The main difference between ETFs and other types of index funds is that ETFs don’t try to outperform their corresponding index, but simply replicate its performance. They don’t try to beat the market, they try to be the market.” You can learn more about ETFs in this video from Morningstar.
You’ll earn a small amount of interest if you put your money in a money market account or certificate of deposit. A money market account is a type of savings offered by banks and credit unions, but they pay higher interest. You’ll need to maintain a minimum balance in your MMA (often $1,000). You can make a few withdrawals each month.Certificates of deposit, which are virtually risk free, are sold by banks and credit unions. A CD has a specific fixed term (months or years) and a fixed interest rate. At the end of the term, you can get your initial deposit back, plus money accrued from interest. Interest rates vary. Right now, the best are offering 1% returns.
2. Let’s say you’re lucky enough to work for a company that offers a 401k (if you don’t work for such a company right now, you should still learn about them for future jobs). Who determines what type of investments (mutual funds, bonds, etc.) your money will be invested in?
b. The company you work for
c. The third-party company that does the investing, i.e. Fidelity
Third-party administrators will have a list of investment options you can choose from. They offer suggestions based on the level of risk you are willing to take.
For instance, a conservative fund will give you lower returns, but there’s also a lower chance you’ll lose your money. An aggressive route will include high-yield investments, but they are also riskier. A moderate path includes a mix of the two.
If you are going to need your money sooner rather than later for retirement, you may want to choose a conservative path. If you have 10 or more years until retirement, you may choose bolder options. You can always change your investments.
Learn more about 401ks in this video from Howdini.
3. If you don’t work for a company with a 401K, you can still invest in your future with an IRA, an individual retirement arrangement. IRAs function much like 401ks (except that you don’t need any employer to sponsor them). With an IRA, you have more investment options, but you can’t withdraw money early, as you sometimes can with a 401k.
The government will only allow you to put a certain amount of pre-tax money into either investment each year. Which one of the following can you contribute the most amount of your pre-tax income towards annually?
a. a 401k
b. an IRA
c. a Roth IRA
Answer: A 401K.
You can contribute more pre-tax money toward a 401K each year than you can toward an IRA. With an IRA, an Individual Retirement Account, you can contribute up to $5,500 annually.
You can put more money — up to $17,000 if you’re under the age of 50 — into your company’s 401K.
Learn more about the difference between IRAs and 401ks in this video.
4. A bond is a(n) _______________ issued by a company or the government to the buyer.
a. Share of a company or government project
A bond is basically an IOU. The investor is loaning money to the bond seller for a set period of time at a fixed interest rate. Bonds are used by companies and the government to finance a variety of projects.
In other words, you’re the bank, and the company or the government is the bank customer. Learn more about bonds, and how risky they are, in this video from Investopedia.
5. Young investors often say they can’t invest any money because they don’t have any to spare once they pay for housing, food, a car and other debts like student loans.
One way to budget for investing is to control your overhead, or the monthly bills you must pay. For instance, your rent or mortgage should never account for more than ____ of your take-home pay.
a. one quarter
b. one half
c. one third
Answer: One third.
We don’t want you to live in a dump, but if you are spending more than 1/3 of your take-home paycheck on housing, most financial planners will wag a finger at you.
Banks won’t likely approve a mortgage for more than 28% of your gross monthly income.
Here at Money Under 30, we suggest that no more than 25% of your paycheck go towards housing.
The less you spend on housing, the more you’ll have for savings and investing. Learn more about how much you should spend on housing in this MSN Money video.
If you got none wrong, you are an investing genius. Call MENSA. You may be ready to start investing your own money, without relying on a company’s 401k or an ETF. That said, keep reading Money Under 30 for advice and news.
If you got one – two wrong, you are above average when it comes to investing. But remember that laws are always changing, and investing evolves as technology evolves. So keep reading Money Under 30 for advice and news.
If you got three or more wrong, start hitting the books before you invest too much money without understanding what you’re doing. Keep reading Money Under 30 for advice and news.
How did you do on our investing IQ quiz? What investing topics would you like to learn more about