How Financially Literate Are You? Take This Test to Find Out

I had a suggestion recently from someone asking if I had published a test on financial literacy. I thought I had, but I couldn’t find it when I went searching through the blog. After a few days, I realized the one I was thinking of was the pre-test and post-test for the Fire Your Financial Advisor course. While that course isn’t free, most physicians (and now their trainees with our less expensive student and resident versions) will find that it is a massive time-saving value as it spoon-feeds you exactly what you need to know to become financially literate and write your own financial plan.

The course was designed to be ultra “high-yield,” but there is no doubt that all this stuff can be learned eventually by reading the blog, books, and newsletters; listening to the podcast; watching the YouTube channel; and participating in our online communities. The course is a shortcut. Spend $800 (a little more if you get the CME qualifying version or 20% less if you take advantage of the THANKS20 code through December 5) and cut as much as two years off your journey to financial literacy.

But I thought it might be fun to put together a little different financial literacy assessment today for the blog. You can use it to rate your own literacy level.

Financial Literacy Assessment

#1 When interest rates go up, bond yields go ______ and bond values go _______.

1. up, up
2. down, down
3. up, down
4. down, up
5. down, either
6. either, up

#2 Invest $1,000 in a money market fund yielding 3.5%, and after three years, you will have

1. $1,000
2. $1,035
3. 1,105
4. $1,109
5. $1,237

#3 When you contribute to a Roth 401(k) account, what kind of tax break do you get?

1. A tax deduction for that year
2. Savings on payroll taxes
3. A business deduction
4. Tax-protected growth until the money is withdrawn
5. Tax-free withdrawals before separation and age 55
6. Tax-free withdrawals after separation and age 55
7. 1 and 2
8. 2 and 6
9. 2, 4, 6
10. 4 and 6

#4 Upon retiring early at age 53, which of the following accounts should be spent from first?

1. 401(k)
2. IRA
3. 403(b)
4. Roth IRA
5. Non-governmental 457(b)
6. Governmental 457(b)
7. Taxable account

#5 You are 47 years old and make $100,000 per year. You are told that you can contribute a maximum of $16,500 [2025] to an account. What kind of account is it?

1. Roth IRA
2. Health Savings Account
3. 401(k)
4. SIMPLE IRA
5. SEP IRA
6. 403(b)
7. Profit-sharing plan
8. Defined balance plan
9. 457(b)
10. 457(f)
11. 409(a)

#6 A Mega Backdoor Roth IRA is a process done using what kind of account?

1. IRA
2. 401(k)
3. 403(b)
4. 457(b)
5. Roth IRA
6. Defined Benefit/Cash Balance Plan
7. 1 and 5
8. 2 or 3

#7 Which of the following is not considered a buffer asset?

1. Whole life insurance
2. Reverse mortgage
3. HELOC
4. Cash
5. 457(b)
6. Short-term Treasuries
7. Pension
8. I Bonds
9. Certificates of Deposit
10. 1 and 2
11. 5 and 6
12. 5 and 7
13. 5, 6, 7, 8, 9

#8 Which investment has the highest expected return and risk level?

1. A stock index fund
2. A small medical business you control
3. An investment property
4. Treasury bond
5. Certificate of deposit
6. Whole life insurance
7. Paying off a 6% mortgage

#9 Which investment has the lowest expected return over the first five years?

1. A stock index fund
2. A small medical business you control
3. Municipal bond
4. An investment property
5. Treasury bond
6. Certificate of deposit
7. Whole life insurance
8. Paying off a 6% mortgage
9. Checking account

#10 Match the following numbers with each letter

1. Vanguard
2. Fidelity and Charles Schwab
3. DFA and Avantis
4. Edward Jones, Northwestern Mutual, Wells Fargo
5. Interactive Brokers
6. Robinhood

1. Reasonable costs and good customer service
2. Gamification of investing
3. Low margin rates
4. Low costs
5. Academic approach to factor investing
6. Concerning company cultures

#11 The first step in developing a written investing plan is

1. Lower your taxes
2. Start saving money
3. Choose an asset allocation
4. Asset (tax) location
5. Determine which investing accounts to use
6. Select investments
7. Formulate SMART goals
8. Rebalance

#12 The current [2025] going rate for a high-quality, full-service financial planner and investment manager is

1. 0.5% per year
2. 1% per year
3. 2% per year
4. $400 per year
5. $3,000 per year
6. $5,000-$15,000 per year
7. $20,000-$30,000 per year
8. $50,000-$75,000 total
9. $80 per hour
10. $600 per hour

#13 The best way for while coat investors to lower their taxes is

1. Hire the right accountant
2. Buy whole life insurance
3. Increase their income
4. Get a cost segregation study
5. Prepare their own taxes
6. Earn, save, and spend in an IRS-prescribed manner
7. Buy investments sold primarily as tax shelters
8. Use actively managed mutual funds in taxable accounts

#14 Which of the following disability insurance riders are generally considered worth buying?

1. Cost of living
2. Retirement
3. Student loan
4. Catastrophic disability
5. Residual disability
6. Future purchase option (for resident purchasers)
7. All of the above
8. 1 and 3
9. 1, 5, 6
10. 1, 4, 5, 6
11. Whatever the agent recommends

#15 You can probably cancel your disability insurance

1. At age 65
2. When you file for Social Security
3. At age 50
4. When you become financially independent
5. When you marry another doctor, if you spend less than one physician’s salary
6. When you get term life insurance in place
7. When you become a millionaire
8. All of the above
9. None of the above
10. 1 and 4
11. 2 and 7
12. 1, 4, 5

#16 The following accounts will cause a pro-rata issue during the Backdoor Roth IRA conversion step:

1. 401(k)
2. 403(b)
3. 457(b)
4. Traditional IRA
5. Rollover IRA
6. SEP IRA
7. SIMPLE IRA
8. Roth IRA
9. Inherited IRA
10. All of the above
11. 1, 2, 3
12. 4, 5, 6, 7
13. 4, 6, 7
14. 4, 5, 6, 7, 9
15. 4, 5, 6, 7, 8

#17 The best measure of a bond’s sensitivity to interest rate changes is

1. Maturity
2. Duration
3. Coupon
4. Yield
5. Type of bond
6. Tax treatment of bond
7. The political party of the president
8. Foreign exchange rates
9. Inflation

#18 Credit cards are best used for

1. Borrowing money for short time periods
2. Borrowing money for long time periods
3. Convenience
4. Rewards
5. Building a credit history
6. Getting into financial trouble
7. Bankruptcy
8. Boosting savings rate
9. Reducing spending guilt
10. 3, 4, 5
11. 1, 3, 5
12. 3, 4, 5, 9

#19 93-year-olds can safely spend what percentage of their nest eggs each year?

1. 2%
2. 4%
3. 5%
4. 10%
5. 33%
6. 50%

#20 Which of the following investments is most diversified?

1. An S&P 500 index fund
2. An actively managed bond fund
3. A portfolio of six short-term rentals in your hometown
4. A target retirement fund from Vanguard
5. A portfolio of 84 individual stocks hand-selected by my advisor

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The Answers

Don’t read below here until you take the quiz above!

#1 The correct answer is 3. Bond yields go up with interest rates, but bond values fall since an investor could now buy a brand new bond with a higher yield rather than the older bond with a lower yield.

#2 The correct answer is 4—3.5% of $1,000 is $35 per year, but compound interest results in a slightly higher value than $1,105.

#3 The correct answer is 10. Roth accounts provide tax-free protected growth and tax-free withdrawals after a certain age (55 for separation for 401(k)s and 403(b)s and 59 1/2 for IRAs).

#4 The correct answer is 5. Unlike the other accounts, non-governmental 457(b) accounts are not held in trust for you; they still belong to your employer, and they are accessible to your employer’s creditors. There is also no 10% early withdrawal penalty for 457 money, making it a very attractive account to spend from first in retirement.

#5 The correct answer is 4. The other accounts have different contribution limits for 2025. A major downside of a SIMPLE IRA is its low contribution limits compared to other employer retirement accounts.

#6 The correct answer is 8. A Mega Backdoor Roth IRA, despite its name, is a process done with a 401(k) or a 403(b) that offers after-tax employee contributions and in-plan Roth conversions.

#7 The correct answer is 5. A 457(b) is an account, not an asset or investment. 457(b) money is typically invested in stock or bond mutual funds, which are not generally considered to be buffer assets. Buffer assets are assets that can be tapped when risky investment markets—like stocks, real estate, and some bonds—have fallen significantly in value. The concept is to spend from the buffer asset until the market recovers.

#8 The correct answer is 2. Many doctors will list their best investment as a small business they control, such as an ambulatory surgical center, endoscopy center, radiology center, urgent care, or dialysis center. These investments are, of course, risky like any small business, but if managed well, they can provide much higher returns than traditional investments.

#9 The correct answer is 7. The cash value of a whole life insurance policy generally doesn’t “break even” until 5-15 years into the life of the policy. Thus, even a checking account paying 0% provides a higher investing return for the first five years.

#10 The correct answer is 1:D, 2:A, 3:E, 4:F, 5:C, 6:B. You must get all pairs right to get credit for this question. While this question involves generalizations and stereotypes, it is best to be aware of a firm’s reputation when selecting financial service providers.

#11 The correct answer is 7. A proper written investing plan is done in the following order:

1. Formulate SMART goals
2. Determine which investing accounts to use
3. Choose an asset allocation
4. Select investments

#12 The correct answer is 6. Whether you pay via an hourly rate, an annual subscription, or an Asset Under Management (AUM) fee, the proper price for a high-quality, “full-service” financial advisor is $5,000-$15,000 per year. If you’re paying more than that, you should check out our list of recommended advisors for someone who charges less.

#13 The correct answer is 6. Many financially naive people think getting a better “tax guy” will save them a lot of money on taxes, or, worse, they get suckered into investments with poor returns purchased primarily for tax benefits. While losing money does lower your taxes, it’s not a great idea. The real way to lower taxes is to change how you live your financial life by doing things like earning less; saving more for retirement, healthcare, and education; spending in IRS prescribed ways (such as on healthcare), starting businesses, giving to charity, investing tax-efficiently, buying a home with a mortgage, getting married to a non-earner, having children, and more.

#14. The correct answer is 9. A residual disability rider is an important rider that provides coverage when partially disabled or returning from disability. A cost-of-living rider increases your benefit with inflation each year you are disabled, and that’s very important if you are disabled at a young age. A future purchase option rider is critical for trainees who can neither afford nor purchase the larger disability policy they will want later. Money spent on other riders—such as a student loan, retirement, or catastrophic disability rider—is probably better spent on a larger base benefit or other financial goals.

#15 The correct answer is 12. Term life and disability insurance can both be canceled when you become financially independent. Disability insurance generally only pays to about age 65, so it is much less valuable once you get into your 60s than it was earlier in your career. Many dual-doc couples reasonably choose NOT to purchase disability coverage, considering that their spouse is their disability coverage. While there are risks to doing this (divorce, dual disability, future desire to spend more than one income), it’s not unreasonable to choose to go bare in this situation.

#16 The correct answer is 12. Employer-provided retirement accounts like 401(k)s, 403(b)s, and 457(b)s, as well as Roth IRAs and inherited IRAs, do not go on Line 6 of Form 8606, where that pro-rata calculation occurs.

#17 The correct answer is 2. This is the definition of duration.

#18 A challenging question to get right, the correct answer is 12. Credit cards generally lead people to spend more and often lead to financial trouble and even bankruptcy. But this obviously isn’t their best use. Their best use is for convenience. It is easier to spend with a credit card for many reasons, which can be helpful if you’re trying to build a credit history or spend more money but hurtful if you’re struggling to get your spending under control. Done properly, spending with credit cards can also provide rewards that you find valuable, particularly for those whose hobby is credit card/travel hacking.

#19 The correct answer is 4. The 4% guideline suggests that one can spend about 4% of the original nest egg, adjusted upward with inflation each year, and can expect the nest egg to last at least 30 years with a high degree of probability. Even 5% works for decades most of the time. A 93-year-old is unlikely to live 10 more years, much less 30 more years. Thus, that person can spend more. While 33% or 50% of the portfolio would be unreasonable, 10% would not be.

#20 The correct answer is 4. A target retirement fund typically owns all of the publicly traded stocks and bonds in the world. The other investments are significantly less diversified.

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How Did You Do?

Go ahead and add up the number of questions you got completely correct. Yes, I know the test was hard. I deliberately made it hard because I know you’re all talented test-takers, and I wanted you to really know the information to get the answer right.

0-11 right: You failed this test. You are not yet financially literate. You probably shouldn’t be managing your own money at this time. You need to make a serious effort to increase your financial literacy. You can do this by reading books, following this blog and its associated podcast, and/or taking our Fire Your Financial Advisor course. Consider hiring help for your investments and your taxes. If you’re a financial advisor, shame on you.

12-13 right: You got a D. That’s not awesome. But it does indicate you’re on your way to financial literacy. Keep doing what you’re doing, but add on something else—such as taking the online course, reading some good financial books, or spending more time in our online communities.

14-15 right: Congratulations! You’ve passed the test. Barely. You can do better. Look up each of the topics you missed, as you’ve exposed some holes in your financial literacy.

16-17 right: Well done. You must really like this stuff. Your efforts have certainly paid off with significant financial literacy. Now, do you have the financial discipline to match it?

18-20 right: You aced this one. Have you considered sending us some guest posts or even emailing [email protected] to inquire about becoming a columnist?

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How did you do? Post your score anonymously in the poll, then complain about the nitpicky nature of the questions in the comments section!