Okay, put down those books and listen up. It’s time for a year-end pop quiz on your understanding of financial matters. This won’t hurt much and, who knows, we might all learn a little something. Ready? Here goes--and no cheating!

Over the long term, do you get the best return on your investments in stocks, bonds or government obligations like T-bills?

Let’s start from the beginning. When you buy a stock, you buy an ownership stake in a company. Every share represents a small slice of the equity of the business you are investing in. Many, but not all, companies pay dividends on their shares. Dividends represent a small percentage of the profits the company has earned.

When you buy a bond, whether corporate or municipal, you are lending money to the issuer on the promise that you will be repaid after a set time period. Because time is money, usually the longer the repayment period, the higher the interest rate.

From 1926 to 1999, the stock market returned an average annual 11.4 percent gain while government bonds returned just 5.1 percent. Bond rates vary widely depending on whether you are talking about high-grade corporate bonds, "junk" bonds or bonds issued by road, sewer or other municipal districts. So-called cash investments like T-bills and savings accounts showed only a 3.8 percent gain during the period.

If you need money for Junior’s college education over the next five years, put it into the stock market where you can get the best "bang for your buck." True or False?

That would be false. With college right around the corner, you can ill afford to gamble Junior’s tuition on the stock market. While the 1990s will be remembered as the greatest money-making opportunity we have ever seen on Wall Street, look at what has happened since March 2000. By the end of that year, some stocks had lost nearly all of their value. Major indexes fell by stomach-churning multiples. The once high-flying technology sector was down by almost two-thirds.

Five years is just about the dividing line between short- and long-term goals. Since you’ll have to access part of the tuition money each year, only a small piece of the total should be put at risk; the balance must be kept safe from market fluctuations.

Unless you are prepared to tell Junior that he’ll be working his way through school or that he might not be able to go to his first choice of colleges, then it's best to put most of the tuition money in safe investments like money markets and Certificates of Deposit.

What’s the difference between saving, investing and trading?

The simple answer is that you save for short-term goals and invest for the long-term.

Trading is when you move your money in and out of investments frequently (sometimes even more than once a day) in an attempt to skim profits or to "time" the market's up and down moves.

Saving means setting money aside in relatively safe investment vehicles where it can be easily accessed if you need it. "Safe" means places such as bank savings accounts, CDs or money market accounts. The tradeoff for the safety of these instruments is that, over time, they pay a relatively low rate of interest. They grow at a pace that may fail to keep up with inflation. As a result, safe investments may not maintain the purchasing power of your money, leaving you with less than you need to cover your expenses.

Investing means making your money grow to meet your long-term needs. Securities, such as stocks and bonds (or mutual funds that hold stocks and bonds) generally produce higher returns over the long run. These kinds of investments carry a greater risk to your principal due to fluctuations in the stock and bond markets.

Generally, if your financial goals don't have to be met until sometime in the future, you should invest more of your assets in growth-oriented securities because your investments will have time to withstand short-term ups and downs in the market. If one of your long-term goals is retirement, a typical strategy is to shift some of your assets from risky to more conservative as retirement nears. This serves two purposes: to generate income and to better protect your principal. Even after retirement, however, being overly conservative may not keep your nest egg growing sufficiently to keep up with inflation.

How long will it take to double your investments if you are able to earn a constant 9 percent every year?

Regular readers may remember the Rule of 72. To calculate how long it takes to double your money, divide 72 by your rate of return (at 9 percent it would take 8 years). You can also work the formula the other way. If you have 10 years until retirement, you can double your investment by earning 7.2 percent.

This might be a good opportunity to say a little about risk.. We all have a certain tolerance for risk. Just as some people love to ride roller coasters, others prefer the Ferris wheel. It’s important to come to grips with the amount of risk you (and your spouse or partner) can handle. In general, stocks have more inherent risk than bonds; and some sectors within the stock universe are more risky than others.

There are other kinds of risk, too.

Market risk is the chance that the price of a security will rise or fall due to changing economic, political or general market conditions--or due to the outlook of the company that issued the stock.

Inflation risk is the risk that your returns may be diminished or reversed by the cumulative effects of inflation.

Credit risk is the chance that a bond’s issuer may default on principal or interest payments.

Opportunity risk is the possibility that a better opportunity may present itself after you have already committed your money elsewhere (or that the market will go up while your money is sitting on the sidelines waiting for a better opportunity to buy).

Currency risk is the chance that foreign exchange rates may undermine the value of any overseas investments you might have.

Interest rate risk is the possibility that interest rates will rise (and bond prices will fall), lowering the value of your bond investments.

The biggest threat to your retirement plan is inflation. True or False?

True. Over the past decade or so, inflation has been held at bay by an active Federal Reserve Board. However the threat of inflation is ever present. We often see stock markets slip for a time, but they have a knack of bouncing back. Inflation rarely, if ever, gives back any of what it takes.

Historically, inflation has taken 3.2 percent off the buying power of your investments. That means the money you have at retirement will gradually buy less and less of the things you need. Unless you keep some of your money in inflation-beating investments (yes, that means taking on some risk), your standard of living will be cut in half in about 22 years.

Anyone can call themselves a financial planner. True or False?

There are no limits on who can hang out a shingle as a "financial planner." However, one must have met standards of education, experience and ethics and have passed a stringent examination before qualifying to use the designation of the Certified Financial Planner Board of Standards.

There are a lot of insurance salespeople, attorneys, accountants, mutual fund employees and bankers who call themselves planners and claim that they are qualified to dispense financial advice--for a fee of course. Be careful with whom you entrust your money.

To find a qualified planner, you can call the Institute of Certified Financial Planners at 800/282-7526 to get a list of CFPs in your area.

Although there are good planners who aren’t CFPs, that designation after a planner’s name indicates that the person has at least three years of work experience in the field, has completed a course of study covering 106 planning-related topics and has passed a 10-hour exam. The license must be renewed every two years, contingent on continuing education requirements and on adherence to a code of professional conduct and ethics.

Another source is Cambridge Advisors (888/834-6333) which specializes in planning for middle-income clients. All licensees must be CFPs, charge on a fee-only basis and participate in a yearlong training program.

Only wealthy folks with greedy relatives need a will. True or False?

Clearly false. Virtually everyone needs a will. Whether you barely have enough to worry about, have made the most of your investments or have relatives you want to keep from fighting over your estate, a properly drawn will can eliminate many of the problems families experience after the death of a loved one.

Estate planning isn’t just for the "rich" any more. A will or a living trust is the device that lets you tell the world exactly how and where you want your assets distributed when you die.

Trusts are legal mechanisms that let you put conditions on how your assets will be used after your death. Trusts are extremely flexible and can be used to accomplish many goals, including sheltering assets from taxes and directing money to specific family members.

Men are usually the sole financial decision-makers for their households. True or False?

False. Experts predict that between 80 percent and 90 percent of all women will have this responsibility at some stage in their lives. There are 58 million women in the work force today, earning more than $1 trillion annually. Women are the fastest growing segment of the investing public, so it's important they spend time studying ways to grow their income into a sound retirement.

Financial inexperience can leave a surviving widow or divorcee vulnerable to the "sharks" who prey on uneducated investors selling exotic financial products and "churning" (i.e., unnecessarily trading) perfectly suitable portfolios just to increase their brokerage commissions.

It is important that husbands, wives and life partners all become versed in the basics of money management, so they can avoid the pitfalls that threaten when there is a sudden change in their lives.

Because the person who is least well-versed in money matters may suddenly have to take control with little or no warning, the key to a smooth transition is planning. Each partner should have a general understanding of what the household finances look like and why certain decisions were made in the first place. Here are some of the points that should be committed to writing:

All of your financial assets. Break them down by type of investment (e.g., mutual funds, common stocks, savings bonds, money market accounts, Credit Union, etc.), account numbers, objective and cost-basis. Include life insurance policies along with the names of agents.

All of your financial liabilities. To whom do you owe money, and for what? List mortgages, car loans, home equity loans, major credit card balances, etc. Is there a plan to pay off some or all of these liabilities?

Financial institutions. Include banks, mutual fund companies and brokerage firms. Show phone numbers, account numbers and registration information for all holdings.

Pension, 401(k), 403(b) and STRS. If you or your partner have changed jobs, you may be entitled to a pension from one or more former employers; you may have a contract or company handbook detailing the benefits available under your current employer’s benefit package; there may be a State Teachers’ (Employees’) Retirement System account. Include in your list the contact numbers for plan administrators who can spell out distribution options.

Advisors. You should list the names and phone numbers of all the financial or estate planners, tax accountants, lawyers or other advisors you have contacted. Know where each other’s wills are located, as well as durable powers of attorney and any documents for trusts that may have been set up.

Instructions. Finally, you should include clear, written instructions on how to handle important issues that a surviving spouse or partner will face. For example, the person who took charge of making financial and estate planning decisions may have anticipated that certain assets would be liquidated at death, while others were intended to be held for the long term. Advice on whether to take a lump-sum distribution, roll-over or annuity from a pension plan, or how to pay monthly expenses should be spelled out.

This year, you can leave $675,000 to your spouse free of any taxes. True or False?

False. A spouse takes control over all of the deceased’s assets with no limit and no taxes. If there is no spouse, the "exclusion limit"--the amount that can pass to other parties without estate taxes--is $675,000 this year. That amount rises gradually to $1 million by 2006 (unless Congress makes changes before then).

Lawyers who specialize in estate planning have a number of tools, such as living trusts and insurance trusts, that they can use to protect the portion of your estate above the exclusion limits from voracious taxation. And the rates are Hannibal-like: estate taxes can exceed 55 percent, and income taxes are added on top of that. The easiest way to turn a million dollars into one hundred thousand is to die in testate, that is, without a will.

As long as I work in education, I’ll never be able to save for my retirement. True or False?

Even if you can find only a small amount to put away every month, if time is on your side (and it is) you can build a respectable nest egg for your retirement. The key is disciplined saving and what Albert Einstein called "the eighth wonder of the world": compounding. Life is full of choices.

Maybe you think that $20 doesn’t amount to enough to make the effort worthwhile. Even at a lousy 5 percent rate of return, a person age 25 who saves 20 bucks a week will accumulate nearly $100,000 by age 60. At 10%--a reasonable rate of return in the stock market--that $20 a week grows into more than $300,000.

Where to begin? I’d recommend a Roth IRA for just about anyone who qualifies. Even though the initial investment is not deductible, the earnings on the account grow unmolested by taxes forever. Even at withdrawal. The current limit is $2,000 per year.

Another place to look is the employer’s 403(b) plan. Although I have written about the dangers of these plans for the unwary (see "Shark Attack" May/June 2000, American Teacher; AFT On Campus), a good plan with a good company can produce the kind of forced savings many people need. Look for a vendor who will let you invest in a 403(b)(7) plan. That’s the kind that uses no-load mutual funds. Which one to pick requires some research on your part.

Still not convinced? There are a number of mutual funds that allow new investors to start accounts with as little as $25 a month; others for less than $100. These are not fly-by-night outfits, either. Big names like T. Rowe Price and American Century, TIAA-CREF and SAFECO are among those that will let you start small and will automatically deduct a set amount from your checking account every month until you reach the normal minimum.

The result is a disciplined investment strategy and the benefits of "dollar cost averaging," a method of investing the same amount at regular intervals and benefiting from the fluctuations in share prices.

Score: If you answered nine or 10 correctly, you’ve been paying attention. Many of these issues were covered in previous "Your Money" columns. Fewer correct than that, I’d recommend keeping a copy of this article handy for later reference. If you want to learn more about the basics of investing, there are many good Web sites out there. Try www.money.com/money101 for starters. Or go to www.abcnews.com and click on MONEYScope or www.armchairmillionaire.com.