How's Your Savings IQ?

How well do you understand the ins and outs of saving for the future?

How well do you understand the ins and outs of saving for the future? Do you know how compound interest works? Or why interest rates can differ from one bank to another? Take our quick Saver’s Quiz to find out.

1. Which of the following is an effective saving strategy?

Setting up an emergency fund and making  deposits as frequently as you can.

Paying off high-cost debt, such as credit card balances subject to high interest rates.

Having your employer direct deposit a portion of your paycheck into a high yield savings account.

All of the above.

2. Which of these types of banks typically offers higher-yield savings accounts?

The local community bank that currently holds your checking account.

A different brick-and-mortar bank in your town.

An online bank.

3. The Annual Percentage Yield (APY) is:

The interest a single deposit accrues in a year.

The annual rate of return, taking into account the effect of compounding interest.

4. The Federal Deposit Insurance Corporation (FDIC) insures deposit accounts per FDIC-insured bank, per depositor, per ownership category up to at least the “standard maximum deposit insurance amount,” which is:

$100,000

$250,000

$500,000

$1,000,000

5. Financial experts recommend you have enough money in your “emergency fund” to cover living expenses for:

8 months

3 to 6 months

1 to 2 months

1 month

6. Bank CD accounts usually offer higher interest rates than bank savings accounts.

True

False

7. What is a “matured” CD?

Any CD account that has been open for more than one year.

A CD owned by an adult.

A CD which has reached the end of its term.

A CD with a balance of $10,000 or more.

8. Compound interest is interest calculated on:

Both the initial principal and the accumulated interest.

Initial principal only.

9. Which of these compounding frequencies will result in the most interest earned?

Annually

Quarterly

Monthly

Daily

10. Which of the following statements would be smart advice to someone planning to buy their first home?

Reduce your debt prior to applying for a mortgage.

Set a specific goal.

Build a budget.

All of the above.

Answers:

1. (4) All of the above

While all of these options are good strategies, you may wish to consider starting with direct deposits into a savings account. Automating your savings can be a great way to get a solid start—and it can be a hassle-free way to keep saving. Having your employer split-deposit your paycheck to your checking account and a separate high-yield savings account can help to ensure that you save every payday. Consider starting with a comfortable amount and then set a date when you’ll revisit—and hopefully increase—the percentage of your income that you can set aside.

2. (3) An online bank

While savings account rates are variable and can change at any time, online banks can typically offer higher yield savings products because of lower operating costs. They don’t have to maintain or staff physical bank branches and can pass cost-savings to customers by offering higher-yield savings accounts and CDs.

3. (2) The annual rate of return, taking into account the effect of compounding interest.

Annual Percentage Yield (APY) is a percentage rate that reflects the total amount of interest paid on an account, based on the interest rate and the frequency of compounding for a 365-day period (and calculated according to regulatory requirements). In simpler terms, it’s the amount a deposit would earn in a year if the deposit remains untouched – and it’s why the APY you see advertised is always a little higher than the interest rate.

4. (2) $250,000

To determine how much insurance is applicable to your accounts and for any other FDIC insurance requirements that may apply, please visit the FDIC website at www.fdic.gov/deposit or call the FDIC directly at 1-877-ASKFDIC (1-877-275-3342).

5. (2) 3 to 6 months

A minimum of 3 to 6 months of living expenses is the general rule. If you can save even more, even better!

6. (1) True

CDs are term deposits—in general, you agree not to withdraw your money until the term is completed. Savings account balances can be variable and fluctuate because you can generally withdraw funds at any time. Banks typically pay a higher interest rate for the term certainty of CDs.

7. (3) A CD which has reached the end of its term

When a CD reaches the end of its term, it has reached “maturity.” Banks are required to notify you that your CD is about to mature, and they’ll give you a few options for you to decide what to do next.

8. (1) Both the initial principal and the accumulated interest

Compound interest is interest payable on both the initial principal and on the accumulated interest. Compound interest rates are generally described by their APY (Annual Percentage Yield) and reflect the amount a deposit would earn in a year if the deposit remains untouched. Simple interest is interest payable on the principal only.

9. (4) Daily

The more frequently your interest compounds, the more interest you can earn. To earn the most interest, daily compounding is preferable to monthly, monthly is preferable to quarterly, etc.

10. (4) All of the above

Typically, lenders say your total debt—including home expenses, credit cards, student loans, and the rest—should not exceed 36% of your income before taxes. In addition to focusing on paying down debt, consider creating a detailed budget to understand where your money goes—and where you can start putting more aside toward your goal of a 20% down payment.

This article is for informational purposes only and is not a substitute for individualized professional advice. Articles on this site were commissioned and approved by Marcus by Goldman Sachs®, but may not reflect the institutional opinions of Goldman Sachs Group, Inc., Goldman Sachs Bank USA or any of their affiliates, subsidiaries or divisions.