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Here are three of the questions that were asked in this survey. See if you can answer all three correctly. If so, we’ll give you an A on the test.
1. What's the percentage of your income you should spend on housing?
If you answered 30%, go to the head of the class. Most experts say that you should stick to about this amount so that you don't become overextended and end up as what's referred to as "house rich and cash poor."
Unfortunately, just one in three or 31% of the people that took this test answered the question correctly. That means 69% of us are unaware as to how much we should spend on housing and the impact it has on our financial future. If you didn't know the answer to this question, don't despair. You can talk to a real estate agent to get the information you need to buy what will probably be your biggest investment – your housing – to make sure you're not buying too much. The downside of devoting too much of your income to buying a house is that you may not then have enough money left for retirement and personal savings.
Here’s a video where a mortgage professional explains how she would calculate how much a person could afford to spend on housing including factors such as the down payment.
2. Will you have enough money to retire and live your same lifestyle if you save 10% of your income annually?
The answer to this question is probably not. A comprehensive retirement plan is like a three-legged stool. It's based on three things – contributions from your employer (in the form of a pension or 401(k)), personal savings, and Social Security. If you are the beneficiary of a really generous employer program and live a modest lifestyle, then saving 10% of your income might be enough. But this is generally not the case for most of us.
How did Americans do on this question? Forty-four percent either agreed that saving 10% a year would lead to a comfortable retirement or were not sure whether it would or not. Men (30%) answered yes more than women (18%).
Also, 43% of those surveyed said that saving for their kid's college education was more critical than their own retirement savings. And only 30% of Americans were able to tell the differences between a traditional and Roth IRA. Thirty-two percent answered incorrectly and another 30% just weren’t sure.
Why is saving for retirement more important than for your child's education? The simple fact is that you can borrow for college but not for your retirement. As a general rule, saving for retirement should come first. However, Americans often put a priority on education expenses.
3. Is it better to have less money taken out your paycheck for taxes throughout the year or to get a large tax refund?
The majority (59%) of those surveyed got this question right. It‘s better financially to have less money withheld for taxes. You might think it's great to get a large refund check in April or May but this is a very costly way to save. This is due to the interest you lose throughout the year plus the things you could have done with the extra money you would get on each paycheck. The good news is that 59% of Americans got the question right; the bad news is that 41% got it wrong. And this is still an important number. In addition, even fewer Gen Y people (46%) said it was better to have fewer taxes withheld. Twenty-six percent were either ensure as to how much they should have in emergency savings or guessed a number that was much less than what's recommended, which is four to six months of living expenses.
What you don't know is costing you money
You can be a genius, a rocket scientist or a nuclear physicist but if you don't know about personal finance, it's very likely costing you a significant amount of money. If you want to have a secure future, it's important to improve your financial literacy. You will find it much easier to achieve both your short and long-term financial goals if you know how to prioritize your savings and your spending.
Speaking of saving
If you don't think that saving money is vitally important to a good financial future, you could take a lesson from Jay Leno who just retired from hosting the Tonight Show. Jay was interviewed recently by Jerry Seinfeld and asked about his secret to making sure that he always had enough money in the bank. It was simple. Jay said just don't spend it. When he hosted the Tonight Show, Jay earned more than $30 million.
And he saved every penny of it.
So how's Jay living?
Jay does standup comedy nonstop, week in and week out – even while he was hosting the Tonight Show. Combining that money with his endorsements meant that Jay made about a cool $15-$20 million a year. This is the money he used to live, eat and amass his incredible collection of motorcycles, cars trucks and airplanes. And he's been doing this since he was a kid. In fact he always had two jobs. He would live off the income from one and bank his salary from the other. This not only ensured that he had money put away just in case but it also instilled in him the lifelong habit of saving that he follows to this very day. For that matter, Jay will likely keep his Tonight Show money stashed away as he is still touring full-time as a comedian.
It’s not just for multimillionaires
Jay’s savings habits are not just for multimillionaires. You could do the same thing. We know it's tough to find one job let alone two. But it's doable. You can then do as Jay has done and use the money from one of your jobs to pay your bills, buy groceries and just plain live your life, while you stick the income from the other job in the bank and forget that it's even there. You might be shocked at how quickly this can add up.
Here's an example. If you got a second, part-time job for 20 hours a week at $10 an hour, that's about $150 after taxes that you could stash away every week. This means that after taxes you would have about $7800 saved in a year. Having $7800 in a savings account would be an incredible safety net given the fact that almost anything can happen at any time. But even more importantly, you'd be doubling that $7800 every year at that job or a comparable one.
If you can't work a second job
We understand that not everyone can take on a second job. Your current job may be so time-consuming or stressful that there's just not enough of you left over to work another 20 hours a week. But even at that there's ways to make money and stick it away into savings. One of the best is freelancing on the Internet. There are a huge number of websites that will pay money for various services such as editing, blogging, creative writing or acting as a virtual assistant. Regardless of what you're an expert in, you should be able to find a site that will pay for your help. And you could do this all at home since its online – in a coffee shop – or any place you can access the Internet.
Rent out a room
If you have an extra room in your house that you're not using or an insulated basement you could rent it out and bring in several hundred dollars a month. Of course, you'll want to make sure that the person to whom you are renting is reliable and will pay the rent every month.
But whether it's through a second job, freelancing on the Internet or renting out a room, if you save 100% of that income it will be easy and more productive than you might imagine. Of course, you may not be able to amass a stable of expensive automobiles like Leno but you should be able to live comfortably, knowing that there is food on the table your expenses are paid and that extra work will keep you and your family secure for many years to come.