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Suze Orman’s College Graduate Money Test

Posted By Jim On 05/25/2006 @ 5:19 pm In Personal Finance | 3 Comments

I’m a sucker for a “test [3]” and so when I saw a brief five question test on Suze Orman’s Money Matters Column (I’m not a fan of Suze Orman or her attitude), I jumped on it. The questions are pretty straightforward, you’ll probably get them all correct, but I think her answer to #2 isn’t entirely correct (you can pick one of two answers and be right).

1. If you wait till you’re at least 59½ to make withdrawals from your 401(k), 403(b), or traditional IRA, you’ll only pay long-term capital-gains tax on your investment gains.
The correct answer is False, you are going to pay income tax on the disbursements whether their your contribution or earnings. What’s scary is over a third of the respondents thought you only pay long-term capital-gains tax on the gains… but that doesn’t explain why more people aren’t opening up these retirement accounts.

2. Which of the following will hurt your FICO credit score?

Her answer is #2 Unpaid parking tickets, I joined the 68% who answered #3 Opening three credit cards at the same time and according to Orman, I’m wrong. Actually, both #2 and #3 are potentially correct with #3 being correct 100% of the time and #2 being correct if you government reports your unpaid parking tickets (about as likely as your library reporting unpaid fines, it’s possible but somewhat unlikely).

3. With a Roth IRA, you’ll pay income tax and a 10 percent penalty on any withdrawals made before age 59½.
The correct answer is false, you can withdraw your contribution whenever you want with no penalty. It’s your earnings/appreciation that comes with the income tax rate + 10% penalty rate payment.

4. John has $500,000 in auto liability coverage. He lends his car to Rob, who has an accident. John’s insurer must pay damages up to the full $500,000 limit on his policy.
I answered False, correctly, but for different reasons. Orman states that insurance follows the vehicle, I was always told that insurance follows the driver.

5. If you start investing $100 a month starting at age 25 and your deft investing touch produces a 12 percent average annual return, you’ll have more than $1,000,000 by the time you’re 65. How much will you have at age 65 if you wait until age 35 to start your $100/month investing plan?
To be entirely honest, I didn’t do the math, I just picked the “obvious” answer, which was $350k (correct). This is one of the common statistics thrown out by personal finance professions to convince you to start saving early (you should!).

6. Five years ago you bought your house and insured it properly. Your mortgage costs about $1,500 a month. Tomorrow, a fire destroys your home. Luckily your insurance will pay the cost to rebuild your home, but in the meantime you need to rent a place that’s going to cost you $1,500 a month. While you’re renting, do you also need to cover your old mortgage?
It’s False (I picked True) unless you have “Unlimited Additional Living Expense” coverage (I have no idea if I do).

You put 10 percent down on a new house and take out a $300,000 mortgage. Because your down payment is less than 20 percent, you’ll need Private Mortgage Insurance. The lowest possible monthly cost for the PMI [4] will be about:
Who the heck knows this one off the top of their head? The answer is $19/mo by the way.

You and your partner own a home together through Joint Tenancy with Right of Survivorship (JTWROS). You also have a will that states your portion of the property should go to your daughter from a previous marriage. If you die before your partner, who gets your share of the home?
I have no idea, I just chose any answer to see what the real answer is. It turns out that in a JTWROS, your share automatically goes to the other person in the JTWROS, in this case your partner. I’ve never researched this before but Orman does mention Tenants-in Common, which is the way my friends have it set up, and in that case the daughter would get your half.

Your father has $25,000 in credit-card debt and no assets. When he dies, will you be legally responsible for paying off his credit-card debt?
The answer is False unless you are listed as a joint owner or co-signer on the card (or any of his debts). This is another one of those hot items mentioned frequently in personal finance circles. Don’t co-sign unless you’re willing to assume the debt 100% (things happen).


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[4] PMI: http://www.aboutpmi.com

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