Can You Spot the Better Deal?

By: Staff

What's the most important difference between a traditional IRA and a Roth IRA?

With a traditional IRA, you pay taxes when you withdraw the money. With a Roth IRA, you pay income tax in the year you earned the money, but pay nothing when you withdraw the funds during retirement.

Bob is 30 and expects to be in a higher tax bracket by the time he retires. Which is the better deal for Bob: to invest in a traditional IRA or a Roth IRA?

If Bob expects to pay a higher income tax rate when he retires, then he's better off paying income tax now and withdrawing his money tax-free.

Nancy only has $5 in her checking account, but she wants to buy a $20 skirt. Which is the better deal: write a $20 check and let it bounce or take out a payday loan and repay it in two weeks?

Payday loans have notoriously high APRs — above 500 percent in most cases — along with financing charges around $20 per loan. But bouncing a $20 check can cost you up to $50 between the fee charged by your bank and the penalty charged by the store. Plus you have to deposit the $15 to get your account back to zero. That amounts to an APR in the thousands.

What's the biggest difference between interest rates expressed as annual percentage rate (APR) and annual percentage yield (APY)?

APR is called "simple interest," because it takes the monthly interest rate and simply multiplies it by 12. APY is a more accurate reflection of what you would actually pay if you held a balance on a loan for an entire year, because it includes the interest that's compounded monthly and carries over.

Which is the better deal: Signing up for a credit card with an advertised APR of 12 percent or a card with an APY of 12.34 percent? (Both cards compound interest monthly).

A card that advertises an APR of 12 percent actually has an APY of 12.68 percent, while a card with an APY of 12.34 percent really has an APR of 11.69 percent.

Which is the better deal: Investing in an IRA or investing in a 401(k)?

IRAs and mutual funds are simply two types of accounts that let you invest in a diversified portfolio of securities within them. They can include stocks, bonds and CDs, so performance of each type varies greatly depending on how the funds are invested.

Steve has an extra $1,000 and wants to pay down some debt. Should he pay down his $200,000 mortgage (3 percent APR) or pay down his $10,000 credit card debt (17 percent APR)?

The rule is to pay down high-interest debt first, because it will cost you more over the life of the loan. And chances are you won't clear 17 percent in the stock market.

Every investor wants to pick individual stocks or mutual funds that will be the best performers in the future. Which of these is the best strategy?

The hard truth of investing is that past performance is not an indicator of future performance. In fact, The Wall Street Journal ran a feature showing that professionally managed funds did only marginally better than the ones picked by a dart toss. Index funds, which cost less than loaded funds, at least guarantee you'll make what the market makes.

Let's say you have a 30-year $200,000 mortgage at an interest rate of 6.5 percent, giving you a monthly payment of $1,264. Your mortgage broker encourages you to make one extra mortgage payment each year to lower the principal faster. If you do that, which number will be larger: the total amount you'll save in interest over the life of the loan, or a winning lottery ticket worth $50,000?

If you make one extra mortgage payment a year, you will save more than $55,000 in interest, plus you will pay off the loan in 24 years instead of 30.

What time of year are you more likely to get the best deal on a new car or truck?

At the end of the year, dealers are trying to get all of last year's inventory off the lot and boost their sales numbers for the year. Likewise, you are more likely to get a good deal at the very end of any month, when sales reps are trying to qualify for bonuses.

Sally has a credit card debt of $10,000 at an interest rate of 17 percent annually. She’s been paying the minimum every month, but it’s taking forever to make a dent. What would be the best way to pay it off?

Savings account have notoriously low interest rates. Instead of letting her $2,000 collect dust in the bank, Sally should use that money to pay down a handsome chunk of her debt, which is growing by leaps and bounds every month.

What is the best month to make an offer on a house?

The dead of winter is the best time to make an offer on a house because few other buyers are actively looking. Also, the owners just received their credit card bill for Christmas and can use the money.

You are planning a long-awaited vacation to France. What is the best way to pay for purchases while traveling abroad?

If you exchange dollars you lose money to service charges, and if you use your credit card, you will be generally be charged a foreign transaction fee of 3 percent per purchase. The best bet is to use your ATM card. You will probably be charged $2 per withdrawal, but if you limit withdrawals by going big each time, you'll save money over the other options.

If you are looking for the cheapest airline tickets, what is the best day to fly?

Airline ticket prices fluctuate with demand for open seats. More people want to fly on Fridays and Mondays (especially business travelers), but demand for Wednesdays is generally lighter. One huge exception is the Wednesday before Thanksgiving!

You are clothes shopping and comparing the sales at two competing stores. Clothes King is advertising "50 percent off all items in the store," and Thrifty Threads is promoting a "buy one, get one free" sale on everything in the store. Which deal will save you more money?

"Buy one, get one free" is the equivalent of a 100 percent discount, which is the same as two 50 percent discounts.

Which was a better deal for the United States in terms of price per acre: the Louisiana Purchase from France or the purchase of Alaska from Russia?

The U.S. bought Alaska from Russia in 1867 for $7.2 million, or 2 cents per acre. The Louisiana Purchase of 1803 ran around $15 million, or 4 cents per acre.

You want to buy a $20,000 car and only have $5,000 saved up for a down payment. The wily car dealer offers you two different options. Number one: Take the regular APR for 6.99 percent for a 60-month loan and get an instant cash rebate of $2,000. Number two: Take a lower APR of 3 percent but no cash rebate. Which deal will result in a lower monthly payment?

The cash rebate plus your down payment lower the principal of the loan to $13,000. Even at 6.99 percent, your monthly payment will be $12 lower per month than opting for the lower APR on a principal of $15,000.

True or false: Since generic medications are cheaper, they are allowed by the U.S. Food and Drug Administration to be less effective than the name-brand equivalent?

Through rigorous testing, the FDA assures that all approved generic drugs have the same active ingredients and the exact same effectiveness as their brand-name competitors.

Credit card deals are notoriously hard to decipher, especially those offering cash back on every purchase. Which is the better deal: A card that gives you 1.5 percent cash back on all purchases, but charges a $100 annual fee, or a card with no annual fee, but zero cash back on every purchase?

You'd have to charge quite a bit to the card for that $100 to pay for itself. If you charged $7,000, you would receive $105 in "cash back" rebates, which is just $5 more than the annual fee.

What was the name of the original host of the American TV game show "Let's Make a Deal"?

Monty Hall (born Monty Halperin) hosted the popular game show from 1963 to 1976.

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About This Quiz

Which credit card offers the best deal? Should you take the cash rebate on the new car or the low interest rate? You are bombarded with confusing financial questions every day. Here are 20 more.

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