Monday quiz
Test your investment understanding with our straightforward Monday quiz
a) Shares;
b) Property;
c) Gilts (British Government stocks);
d) High interest Cash ISA.
2. What is likely to be the most expensive way of buying a new car?
a) Saving regularly towards the cost and then paying cash up front;
b) Paying by credit card at an interest rate of 19% and repaying the balance gradually over the next three years;
c) Taking out a five year personal loan at a rate of 10%;
d) Adding the cost to your mortgage and repaying it with the normal mortgage payment over 25 years at a rate of 5%.
3. Who’s the smart one out of these four 35-year-old homeowners?
a) Sean has redundancy and sickness insurance; so he doesn’t need to
take this into account in deciding on the level of his emergency savings
fund;
b) Isabella doesn’t have any insurance but knows the State provides sickness benefit and if she loses her job she gets a month’s salary as redundancy pay;
c) Louis doesn’t have redundancy and sickness insurance but has decided that if he gets into trouble he can always draw from the pension savings that he’s built up;
d) Mae does have redundancy and sickness insurance and calculates that if she needs to she can always draw from her ISA savings that she’s built up.
Answers
1. Answer: d) As an investment, cash offers the lowest risk of losing
money but also the lowest long-term growth potential. This is because,
in essence, cash is not a “real” investment; it has value only as a
means of exchange for goods and services whereas “real” investments such
as company shares and property have an intrinsic value and in theory
will grow in value over time as they benefit from economic growth. Of
course, in times of economc recession, such as now, the opposite may be
true.
2. Answer: d) Compound interest earned on savings works in reverse on loans. Therefore, in the same way that, for a saver, compound interest works to greater advantage over a longer period, the reverse is true for a borrower, so that even given a much lower interest rate the overall cost would be greatest where the cost is added to the mortgage. The cheapest method would be answer a) You benefit from compound interest on the savings you’re building up and pay no interest on the item you’ve purchased.
3. Answer d) It’s sensible to have insurance cover for events like redundancy or long term sickness, so well done to Sean (answer a) and Mae (answer d.) However, this type of cover often involves “qualification periods,” which mean the policy doesn’t pay out for, say, 13 weeks or even six months. Also, the cover seldom if ever provides for full replacement of the potential income lost. Therefore, Mae is the smartest cookie in the jar because it’s a good idea to complement insurance with a suitable emergency fund. Isabella and Louis don’t have any insurance against losing their jobs or suffering long-term sickness or disability, so it’s a black mark to both of them. Isabella has at least realised that she’ll get something from the State if she falls ill and from her employer in the event of redundancy, but what she’s ignoring is that neither benefit will be adequate in itself. State Incapacity benefit is basically a “safety net” payment to ensure that someone who is unable to work for medical reasons has some income coming in; one month’s redundancy payment will help for, well, one month. What happens after that if she hasn’t been able to find a suitable new job?
