We all dream of the things we would do if only we had the money. Maybe you want a home, a car, and to be debt-free. Maybe you plan on making a million dollars. Maybe you just want to spoil your cat.

Whatever your sights are set on, you need basic knowledge about saving and investing to get there. Do you know your way around your finances?

#### We came up with five questions to test your basic financial knowledge. Let’s see how you do:

1. Imagine you have a savings account earning 2% interest and inflation is 3%. After one year, the money in your account will allow you to:

- Buy more than today
- Buy less than today
- Remain the same

2. Say you have a $600,000 mortgage. You sorted your KiwiSaver and you have $10,000 in credit card debt. Then you win $5,000 in the lotto. What’s the most financially savvy thing to do with that money?

- Put it in KiwiSaver
- Put it towards your mortgage
- Pay down the credit card debt

3. Your phone dies and you desperately need a new one. It costs $1500 and you put it on a credit card at 20% interest. If you fail to make your payments, how long will it take for the balance to double?

- 2 to 4 years
- 5 to 10 years
- More than 10 years

4. Investing in a single fund is less risky than investing in multiple funds.

- True
- False

5. Which of the following fixed-rate mortgages will cost the most in total interest?

- 10 years at 5%
- 15 years at 4%
- 20 years at 3%

Think you nailed it? Let’s find out what you know.

**Question 1:** Correct answer = buy less than today

Inflation refers to an increase in the cost of living. It means your money has less value and will purchase less. An inflation rate of 3% means the average cost of living has gone up 3%. So if the interest rate on your savings account is less than the rate of inflation, you’re not actually earning enough to get ahead.

Inflation is why things like gas and food are costing more than they did a few months ago. Right now, the inflation rate in NZ is 5.9%, the highest it’s been in 30 years. (Time to adjust your budget, or make one if you haven’t already.)

**Question 2:** Correct answer **=** pay down the credit card debt

Your credit card debt is costing you the most. The average interest rate on a credit card in NZ is 18% and can be as high as 29.95%. That interest compounds, usually daily, putting you further into debt with each passing day. Kiwis pay out $600 million every year just in credit card interest!

In contrast, average mortgage rates are just under 5%. Getting rid of high-interest debt is the fastest way to get you on track to improving your financial situation. And while we encourage contributions to your KiwiSaver fund, by continuing to carry credit card debt you are wasting money on interest at a faster rate than your KiwiSaver fund can earn.

If you have credit card debt, do yourself a favor and pay it off as fast as you possibly can. If you use your card regularly, pay off the balance every month to avoid interest.

**Question 3:** Correct answer **=** 2 to 4 years

Yep we’re going to harp on credit cards a bit more. Thanks to compounding interest, your balance will double within 2-4 years if you don’t make the payments. That $1500 phone is now $3000.

There’s a simple bit of math you can apply here called the “Rule of 72.” Divide 72 by the interest rate (or rate of return on an investment) and the result will tell you approximately how long it will take the balance to double. On a card with 20% interest, 72 divided by 20 = 3.6. That’s 3.6 years.

Compounding interest is a wonderful thing when it comes to investing. For instance, if your investment has a 10% rate of return, it would take 7.2 years for your money to double (of course this is a simple estimate and meant to be a guideline only). But when it comes to credit cards, the greedy banks are the ones reaping the benefits.

**Question 4:** Correct answer = false

If all of your money is invested in one place, you are completely at the mercy of what happens to that investment (remember Enron?). Unless you get extremely lucky and put all of your money in something like Apple in its early days, you run a big risk of losing.

That’s why diversification is key. Diversified investments spread your money out over several kinds of investments. So if one investment takes a hit, you are cushioned by having money invested in other places. It minimises risk by not putting all your eggs in one basket.

This is one reason why KiwiSaver is a safe and easy way to get started investing. Funds are diversified and categorised according to risk. Sort your KiwiSaver today so you can get the most you can out of it.

**Question 5:** Correct answer = 20 years at 3%

The interest rate is lower, but the length of time means you’ll pay more over the long run. You are better off with a slightly higher interest rate over a shorter period of time. Your payments will be higher, but the debt will be gone faster, so you will give the bank less interest. And who wouldn’t want to keep their money rather than give it to the bank?

Well, how did you do? If your financial knowledge is a little shaky, head over to the BetterSaver blog and follow our socials @bettersavernz for regular tips to help you get financially lit.

#### And here’s a bonus question:

If a 45-year-old earning an average wage in NZ stays in a default KiwiSaver fund instead of choosing a growth fund right away, how much money are they potentially leaving on the table?

- $260
- $2,600
- $26,000

If you guessed **3**, you’re absolutely right. Take our Fund Finder quiz to sort your KiwiSaver in about five minutes so you don’t end up being that guy.