The HowMoneyWorks Books

QUESTION #1

Percentages

If you owed someone $500 plus interest, which would be higher to pay back?

No trick question here, just basic percentages. $510 is $500 + 2%. $500 + 5% is $525, which is more than $510. The ability to calculate simple percentages can help you make smarter money decisions.

QUESTION #2

Inflation

If both your income and the prices of groceries, gas, and other products you buy were to double over the next 20 years, how much will you be able to purchase?

More than you can buy now

Less than you can buy now

The same as you can buy now

Inflation is the rate at which the price of goods and services rises over time. If the annual inflation rate is 2% but your account only earns 1%, the cost of goods and services has outpaced the buying power of the money in your account. But if you earn 2%, your income will be the same as the rate of inflation.

QUESTION #3

Compound Interest

You have $1,000 in a savings account earning 1% annually. What would your balance be after 10 years if you never withdrew any money from your account?

More than $1,100

Exactly $1,100

Less than $1,100

One of the most foundational money concepts is that interest compounds. If you earn 1% interest per year, the interest earned after the 1st year would increase the amount in your account to $1,010. After the 2nd year, you would earn 1% on the $1,010, which would bring your account to $1,020.10. Continuing that pattern, your money would grow to $1,104.62 after the 10th year.

QUESTION #4

Impact of Losses

Suppose you lose 50% of a $10,000 investment. How much return would you need to get back to $10,000?

A gain of 50%

A gain of 75%

A gain of 100%

It may seem logical that to regain a 50% loss, you need a 50% gain. However, that thinking is off. A 50% loss on $10,000 leaves you with $5,000. To get back to your original amount of $10,000, you need to double $5,000 (the amount after the loss) which requires a 100% gain! This is why protecting your money from the impact of losses is such a core money strategy.

QUESTION #5

Risk Diversification

Generally speaking, is it more secure to put your money into:

One place

More than one place

Putting your money in multiple places is usually less risky. With a single place, all your eggs are in one basket. But when you diversify across multiple places, you may lower the negative impact on your return if a single place doesn't do well.