But some of these questions about key money and finance basics tripped up some of our readers – almost no one got all five answers right. Making financial decisions without knowing the correct answer to even one of these questions can easily shave six figures or more off your lifetime wealth.

So I urge you to pay close attention to the correct answers below. You’ll also find a list of our six contest winners at the end of this post.

Here are the correct answers given by readers to the five questions…

Question #1: If you finance a $30,000 car through a finance company, your actual cost for the car is the money you spend on it, plus the interest you pay, less the value of your trade-in at the end of your loan repayment period.

If you pay cash for a car, what’s your actual cost for the car?

Answer: Joe Goldsmith pointed out what many people with alphabet soup after their name don’t get – that “paying cash for the car is just another form of financing.”

John Nicholson summed it up succinctly: “If you pay $30,000 cash for a car, your actual cost is the money you spent on the car, less the trade-in value at the end of the period, plus the opportunity cost – the loss of interest that the $30,000 could have earned.”

Perry Blouin went on to calculate the enormity of the total loss you could have over 40 years because of this “opportunity cost.” And Valerie Coffman noted, “If you use a Bank On Yourself policy (to pay for the car), you make money as if you never took it out, and you make money on yourself when you pay it back. Awesome!”

As Eric pointed out, “with Bank On Yourself, you accumulate the $30,000 and when it comes time for your vehicle purchase, request a check from the insurance company, receive it within 48-72 hours and then be ready to negotiate with the car dealership.”

Using your Bank On Yourself policy to pay for major purchases also gives you access to money on your terms rather than someone else’s. You can pay it back on your own schedule without worrying about bill collectors, late fees or black marks on your credit report. It beats financing, leasing or even directly paying cash for things by a long shot.

To find out how much more lifetime wealth you could enjoy – simply by using the Bank On Yourself method to make major purchases versus the other options available to you, request a FREE no-obligation Analysis that will show you your bottom-line results. I think you’ll be amazed!

Question #2: If you have a $20 stock and it goes up by 40%, how much money did you make on that stock? (Hint: This is about a key financial principle, not a math question.)

Answer: The talking heads on Wall Street NEVER get this one and do their best to make sure you don’t figure out the blindingly obvious answer to this question!

As Ruth noted,

You don’t make any money until you actually sell your stock.”

Likewise, it makes me crazy when people talk about how much value their home has lost since the real estate bubble burst. You don’t have a REAL gain (or loss) until you sell an asset and lock your profits in.

Which is in stark contrast to the Bank On Yourself method. The gains you receive each year (guaranteed and predictable) are locked in the moment they’re credited to your policy. As for losses… well, there aren’t any. This is based on an asset class that has increased in value every year for over 160 years!

Question #3: According to Morningstar, Inc., the top-performing mutual fund for the last decade (ending December 31, 2009) enjoyed an 18% annual return.

However, the typical investor in that fund wasn’t so fortunate.

What was the annual return of the typical investor in that top-performing fund? And why was their return so different from the return reported by the fund?

Answer: Only one person – Raymond Trembath – nailed the shocking correct answer to this question (no one else came even close), and he also noted the reasons why:

“The typical investor in the best performing mutual fund of the last decade lost 11% annually, even though the fund itself rose by more than 18% annually. The reason this could happen is that all mutual funds are legally allowed only to advertise the results of their ‘buy and hold’ investors, in spite of the fact that long-term mutual funds tend to be held for less than half a decade!”

Doesn’t this typify the smoke and mirrors that the Wall Street Casino uses to pull the wool over our eyes?

If you find it hard to believe that the results mutual funds report could be so different than the results the investors in those funds get, I urge you to read the article supporting this from the Wall Street Journal.

Question #4: What percentage of mutual funds, financial advisors and investment advisory services underperform the overall market? And why?

Answer: Nick H. hit this one spot on when he said, “80% per Hulbert Financial Digest.”

And it’s not just because of the fees they charge. It’s because all the “experts” are humans, too, and are “predictably irrational,” buying and selling at the wrong times.

Question #5: You could have $10,000 in a mutual fund that reports an average annual return of 25% for four years… and at the end of the fourth year end up with only the $10,000 you started with.

How is that possible?

Answer: Doc Youngblood’s little story was such a great, entertaining explanation of this, I decided to include his response in full:

“How is it possible to have $10,000 in a mutual fund that reports an average annual return of 25% for four years… and at the end of the fourth year you end up with only the $10,000 you started with?

The key to the question’s answer is hidden in this short, simple story, but hidden in plain sight for those willing to see.

And the story? You’ll like this I promise—no animals were hurt during its filming.

Imagine we are duck hunting and I shoot. I miss by a foot behind the duck. So I quickly aim and shoot again. I miss by a foot in front of the duck.

By the law of averages, I hit a bulls eye. By the law of dinner, my plate is still empty.

So, if your mutual fund reports an average annual return of 25% for four years, does that mean you’ve got more money in your account?

Let’s play:

Four years later you still have a $10,000 balance. But not once did the rate of return equal 25%. Here’s the percent change for each year: 100-50+100-50. So we add that up (100%) and then we divide that by four years to show our average rate of return is 25% for four years.

Wait! A 25% average rate of return is supposed to be a great thing, right?

Follow the cash in the example above—did the cash increase? The numbers above show one scenario with a 25% average rate of return and ending up with exactly the same money you started with.

However, 25% annual compound interest is a great thing. Take a look:

Year One: $10,000 becomes $12,500 at 25% compound interest.
Year Two: $12,500 becomes $15,625
Year Three: $15,625 becomes $19,531.25
Year Four: $19,531.25 becomes $24,414.06

Were you like me and confused about the two definitions? It’s very common to confuse them AND to assume that the average rate of return is a linear type of activity, one year after the next being the same. Average rate of return and compound interest are not the same.”

(For the record, you’ll find no smoke and mirrors when you see the bottom line numbers and results you could get when you add Bank On Yourself to your financial plan.)

Now for the list of our six contest winners…

There were so many insightful answers that it was hard to pick out only six winners. (All are being notified by email.)

The best entry, picked by our Bank On Yourself team, is Doc Youngblood, who wins a $100 Amazon Gift Card! (Doc – I guess you can tell your wife she was right!)

And the two runners up, who’ll get their choice of a $25 Dining Gift Certificate or a personally autographed copy of my best-selling book, Bank On Yourself: The Life Changing Secret to Growing and Protecting Your Financial Future, are:

1. Eric

2. Raymond Trembath

There were also three winners who got at least one question right, who were randomly chosen to win prizes. The winner of the second $100 Amazon Gift Card is Robert N.

And the two randomly chosen winners who’ll get their choice of a $25 Dining Gift Certificate or a personally autographed copy of my book are:

1. Carl Schoner

2. Rita

Thanks to everyone who participated in this blog contest. You are all winners for thinking – and seeing – through the conventional wisdom about money and finances that has cost so many people so much in lost money, lost time and broken dreams.

Enter below to win these prizes!

You could win an iPod Touch, $100 Amazon.com gift certificate, a $25 dining Certificate and more!

In case you missed last week’s contest, I had posted a podcast discussing some of the internet forums where people anonymously debate the merits of Bank On Yourself and discuss whether or not it’s a scam.

On one of those threads that comes up very high in the search results, one of my toughest, potty-mouthed critics has slowly come around and admitted I’m right about many of the points I’ve been making.

When challenged by another poster about the actual returns people get in the stock market, he dragged out 29 years of records of his own investing accounts, and was shocked to discover what his returns had actually been.

The contest was simple to enter – just listen to the podcast where I revealed what my critic discovered was his actual annual rate of return BEFORE accounting for inflation and taxes… and then tell us what the percentage was.

Since the contest has ended, I can reveal the answer now.  My critic averaged a 4.5% annual return over the past nearly three decades of investing in the stock market.

That’s BEFORE accounting for inflation, which averaged more than 3% per year, bringing his real return down closer to 1% per year.

And since much of his investing has been in tax-deferred accounts, he has yet to pay taxes on that money.  Of course, he doesn’t know what the tax rates will be during his retirement, when he’s taking income from those accounts.

But what direction do you think tax rates will be going over the long term?  (If you said “down,” I’ve got a Rolex watch I’ll sell you for $20.)

When you account for inflation and taxes, the question that ought to hit you over the head is…

Was it worth it?!?

Was it worth all the roller-coaster ups and downs and the sleepless nights to get 4.5% per year before taxes and inflation?

As I pointed out in the podcast, Bank On Yourself can beat that with a stick.   And without the risk or volatility of traditional investments.

My critic’s experience wasn’t unique, although I’ll commend him for actually looking at his statements and then being willing to admit publicly – if anonymously – his disappointing results.

One subscriber to the Bank On Yourself blog made a similar discovery and posted this comment on last week’s blog:

Wow. I had the exact same experience when investigating Bank On Yourself before starting my own plans (have multiple policies and am LOVING the results – exactly as predicted or better, no surprises and I sleep well at night). I made the same Google search and spent hours poring over the posts. What struck me was that nobody ever presented any evidence of any kind of scam. Some folks disagreed with the assumptions or touted their wildly inaccurate assumptions about equities as a more attractive alternative, but never did anyone have anything remotely scam-ish to report.”

This comment came from Dan Proskauer, a very analytical man who has spent literally hundreds of hours researching Bank On Yourself, running spreadsheets and crunching the numbers.

He says the Bank On Yourself method looks better the more he studies it.  Dan revealed the conclusions of his research in an interview I did with him last year.  I’d encourage you to read or listen to it.

And this concise comment made last week by a subscriber named John really summed up what a lot of people are (finally) figuring out…

I LOVE my Bank On Yourself plan, it does everything I was promised and more. I’ve not borrowed a penny from a bank or credit card in over a year. Why should I? I lend it to myself! And if you want a scam, I have two words for you … Wall Street”

Now for the details of our NEW contest…

A comment was made on the same thread that debates the merits of Bank On Yourself that it essentially works the same as a savings account, but with the added advantage of having a death benefit.  This statement really got me thinking.

While there certainly are some ways in which Bank On Yourself-type policies function like a savings account, I can think of a lot of major, critical differences.

But rather than me telling you what those differences are, I’d rather hear what you believe they are.  And some of our subscribers are a whole bunch smarter than I am.

So, I’m holding another contest, and our team will pick the five best answers and award a top prize of an iPod Touch (a $229.00 value), a second prize of a $100 Amazon.com gift certificate, and three runner-up prizes that will give you a choice of a $25 dining gift certificate or a personally autographed copy of my best-selling book for you or to give to someone you care about.

Just answer the following question in the comments box below no later than midnight, Monday, October 3:

The contest question is:  How is dividend-paying whole life insurance different from a savings account (besides the death benefit)?

You can address one or more differences, or comment on someone else’s response to qualify.

And if you think I’m “full of it,” feel free to tell us that, too.  (Some of our subscribers don’t seem to need any encouragement to do that…)

We’ll circle back here next week to report on the contest results and winners.

To qualify, just type in your response in the comments box at the end of this post no later than midnight, Monday, October 3rd.  Please note that all comments are moderated, so there will be some delay before it appears.  (Sorry – open to U.S. residents only.)

And now for the winners of last week’s contest.  As I mentioned, we received hundreds of entries with the correct answer by both email and via the blog comments.  These five randomly chosen winners have all been notified by email:

$100 Amazon.com gift certificate – Sheri Browning

The four winners of the $25 dining gift certificate or autographed book – Jeannie Fisher, Kevin Caldwell, Lynne, and Rich Rhoads

Okay!  Scroll down to the comments box and enter the contest…

One such thread that comes up high in the search results has nearly 200 posts spanning the last year and a  half.

On this lively audio podcast, Bank On Yourself founder Pamela Yellen discusses how her toughest anonymous critic on that thread has slowly been coming around.

He now (grudgingly) admits that Pamela is right about many of the points he has been contesting.  And, when challenged by another poster about the actual returns people get in the stock market, he even dragged out 29 years of records of his own investing accounts, only to conclude that he is “just an average investor.”

To listen to this fast-paced, surprising interview, click on the play button below, or you can download the recording as an mp3 and listen to it on your own player or iPod now at:

Near the end of this 15-minute interview, you’ll also discover a fast and simple experiment you can try to determine if Bank On Yourself really is a scam… or if it’s the ultimate financial security blanket in both good times and bad.

We really want to hear your comments and feedback!  Tell us what you think in the comments box below.  Please note that any comments containing the answer to the question of what was Pamela’s critics rate of return will be posted after September 24th, so as not to give away the answer…

Executive Summary: Knowing your true risk tolerance, or what we more broadly define as your personal Peace of Mind Quotient (POMQ), is vital to effectively directing your savings and investing strategies throughout the course of your life.

Really, until you get a handle on the emotional price you are willing to pay in pursuit of higher financial returns, you have no business chasing wealth.

People who fail to take their POMQ into account when developing their savings and investment strategies very often pay an exorbitant and unnecessarily high emotional penalty for their shortsightedness. Here we provide you with a fun and thought-provoking Peace of Mind Quotient Self-Assessment and encourage you to take five minutes or less to discover your score.

The conventional wisdom is that “peace of mind” is priceless.

It isn’t.

All of us have some level at which we are willing to tolerate stress, discomfort, worry, anxiety or other unpleasant feelings if the potential financial rewards are large enough.

Think of the popular NBC television show, Minute To Win It.  Contestants – ordinary folks with no special skills or athleticism – compete in up to ten consecutive 60-second challenges using common household items.

As the winnings mount, each challenge becomes progressively more difficult.  The suspense builds over the contestants’ fateful choice to pocket the cash they’ve already won or continue in pursuit of the ultimate prize of $1 million.  If at any step along the way they falter, the game is over and they must forfeit their earlier winnings.

Would you risk 60 seconds of intense stress and many thousands of dollars of existing gains for a shot at $1 million?

The analogy is not perfect, given that the game show contestants will make or break their fortune during a one-hour program, with time out for commercials.

William Shakespeare

Yet consider how many Americans – perhaps including you – play a real-life version of Minute To Win It on a regular basis?  With no particular training or financial athleticism, they hope to springboard their investments in stocks and mutual funds into a much larger portfolio, while risking all their previous gains and much of their principal.

More than 400 years ago, in Hamlet, William Shakespeare declared, “This above all else: To thine own self be true.”

Yet, most individual investors never are.

Each time the stock, real estate, commodities or precious metals markets convulse, millions of Americans realize they haven’t been honest with themselves.  Like a hard slap across the face, they are awakened to the stinging realization that they’ve willingly opened their lives to a whirlwind of emotional turmoil in exchange for a perceived chance at greater wealth.

Money is supposed to bring us peace of mind – not rob us of it…

That is why knowing your true risk tolerance, or what we more broadly define as your personal Peace of Mind Quotient (POMQ), is vital to effectively directing your savings and investing strategies throughout the course of your life.

Really, until you get a handle on the emotional price you are willing to pay in pursuit of the highest financial returns, you have no business chasing wealth.

People who fail to take their POMQ into account when developing their savings and investment strategies very often pay an exorbitant and unnecessarily high emotional penalty for their shortsightedness.

Even if they one day walk away a “60-second” millionaire – and please know that most people never will hit the jackpot – do they look back and judge that it was worth the almost inevitable damage to their health, family relationships and quality of life along the volatile road to success?

At least if stress and anxiety somehow increased one’s likelihood of success, accepting such discomforts might be more justified.  Ironically, however, often those investors who go the farthest out on a financial limb, get pummeled with the double whammy of a huge financial fall and utter peace-of-mind bankruptcy.

As soon as the money is gone and hope evaporates, regret and self-recrimination move in for a long stay.

How much of your possible investment return are you willing to set aside to insure peace of mind?  Ten percent?  Fifty percent?  One-hundred percent?

How much of your serenity, comfort, composure, lifestyle and sleep, are you willing to sacrifice to generate a larger net worth – or, more precisely, the prospect of a greater net worth?

Here’s a quick test of your overall personal Peace of Mind Quotient…

Answer the following questions as candidly as possible:

1. If you were in Las Vegas right now, would you be comfortable wagering $1,000 on the likelihood that the spinning roulette wheel will come to a halt on a red number?  The chances of that happening are just under 50-50.  If you’re correct, you’ll double your money.
2. Would it alter your decision if the amount in play is only $10?  How about if it is $10,000?

The odds, of course, remain the same regardless of the size of your wager.

How about staking some serious money on the possibility of landing on one specific number at the roulette table?

Are you more inclined – or less inclined – to bet the same $1,000 on hitting a single number knowing that the odds of winning are less than 3 in 100, but the payout if you do win would be $35,000?

Will you make that bet?

Among the many thousand readers of this article, we can say with certainty that there are some people who’ll reply “yes” outright; more who’ll say “yes” with conditions – such as better odds or a smaller wager; and many who’ll reply “not a chance, I don’t gamble.”

There is no absolute correct or incorrect answer.

Whatever choice you make, as long as you’re being honest with yourself and you can afford it both financially and emotionally, is correct for you.

Circumstances, of course, may weigh heavily on the ultimate wisdom of your actions.  If you are a multi-millionaire earning thousands of dollars a day in interest alone, then risking and losing $1,000 in Vegas likely won’t have much emotional or financial impact.

On the other hand, if that $1,000 represents your family’s grocery money for the month – and you lose it on one spin of the wheel – chances are you’ll suffer mightily for your gamble.

How to find out your own Peace of Mind Quotient

Accompanying this article is an entertaining and insightful Peace of Mind Quotient Self Assessment.  Answering this multiple-choice questionnaire will take you less than five minutes, but will undoubtedly leave you thinking about your investing style for hours, days and perhaps even months to come.

That is exactly what this self-assessment is intended to do: Bring forth your true attitudes about Peace of Mind and its value to you.

Asking yourself these questions and gauging your answers will definitely help you understand your individual POMQ – and hence, allow you to be a more successful investor.  That is, if you define “success” as a blend of return on your money and the quality of life you enjoy while earning it.

In designing and refining this self-assessment, we found it surprisingly enjoyable to ask our family members and friends to also answer the questions and then meet to exchange and discuss our results.

Funny how you never know what even your closest family members think unless you bother to ask.

When you do complete our self-assessment, we’ll provide you a generalized evaluation of your POMQ and our recommendation of how it might be used to influence your savings and investment decisions moving forward.

Note that we specify this is a generalized evaluation.  Without knowing more about you, your specific circumstances, and other important aspects of your life, your POMQ score and our suggestions should only serve as one of the factors you rely upon when making real-life financial decisions.

If you don’t actually want to take the assessment, but would like to see the POMQ categories and recommendations that we’ve established, you can do that here.

Because we all change over time, your POMQ is not a permanent score.  It may change as your circumstances do – and so we plan to remind you periodically to retake the assessment.

Gaining fresh insights about who you are and why you invest the way you do is always a worthwhile exercise.

It’s never a bad time to get to know yourself better!

Once you’ve taken the Peace Of Mind Quotient Self-Assessment, you’ll find our recommendations below on how to use your score to help guide you when making critical financial decisions.  (Learn why knowing your Peace Of Mind Quotient is important.)

Men (and Women) of Steel

You have nerves of steel.  Compared with us and most people we know, you’re from another planet.

You can lose money faster than a speeding bullet, but leap past it as if it were nothing more than a tall building.  You withstand severe market volatility and financial gravity with endurance and abilities far beyond mortal men.  You challenge the course of mighty financial forces – such as brokerage fees and hidden expenses– and fight a never-ending battle for wealth, bragging rights and the Wall Street way.

Although we never recommend your style of wealth-building to our readers, family or friends, we do respect that you know who you are and we encourage you to invest accordingly.

If your sentiments ever change or you eventually grow tired of market-generated kryptonite – a.k.a., huge unrelenting losses – you might consider some of the methods we do favor.

For now, all we can say is let the dice roll and safe high flying.

The Force is With You

As Darth Vader once hissed in the movie Star Wars: “The Force is strong with this one.”

Only in this instance, it is temptation that is a powerful energy in your life.  You covet the money and the thrill that result when you bet the long odds and win.

Unlike “Men (and Women) of Steel,” however, you are not immune to the guilt and regret that comes with betting wrongly.

We recommend you set aside perhaps as much as 50% of your savings for risky, volatile strategies (Wall Street, mutual funds, precious metals, commodities and the like) and dedicate the remainder of your portfolio to the sure and steady, such as the Bank on Yourself system of wealth creation.

Wouldn’t It Be Nice

Maybe if you think and wish and hope and pray it might come true: You might hit it big on a hot stock; watch your mutual fund produce the year’s best returns; sell your gold just before it tanks; or buy and flip a house for a cool couple hundred thousand dollars.

Then again, maybe not.

Somewhere in your heart, you suspect you’re not cut out to be a consistently high-risk player.  But it doesn’t mean you can’t dream and can’t afford to tempt fate now and again.

We recommend you set aside no more than 25% of your savings for those uncertain and volatile opportunities. Everything else should be safely placed in a guaranteed, no-risk, wealth-building system, such as Bank on Yourself.

The Road Not Taken

There is more than one path to wealth.  You are willing to take the one less traveled and that will make all the difference.

While the great majority of Americans cling to the belief that they absolutely must accept risk and volatility in order to build wealth, you understand that conventional wisdom is not always the right choice.

Often, you realize, the race goes to the tortoise, not the hare.

For you, all risk is not forbidden.  And one day, when your financial fortress is complete, you might even want to revisit some of the riskier plays that for now you are wise to bypass.

Until then, stay the course you’re on.  No more than 10% of your nest egg should be in stocks, precious metals, or other volatile vehicles.

Glide on the Peace Train

Now I’ve been happy lately, thinking about the good things to come

And I believe it could be, something good has begun”

- Cat Stevens

Clearly, you are one of the tens of millions of American’s who do not – and never will – worship or envy money.

Most members of this group view money as a means to an end – one that includes a sense of order, safety, financial security and an anxiety-free lifestyle.  To sacrifice any of these assets in exchange for greater wealth would be foolhardy.

That’s not to say you don’t enjoy money and the many benefits it brings – so long as you have your priorities correct.

You can, and will, grow wealthy without risk or volatility, if you continue to be patient, focused, and follow the type of life-long wealth-building strategies practiced by hundreds of thousands of satisfied Bank on Yourself followers.

You’re already on the express train to a rich and satisfying quality of life.  Stay put!

“As we’ve watched our IRA, 401(k), and stock portfolio dwindle, we are relieved we have a chunk of our net worth in our Bank On Yourself plan. It creates a place where our money is safe, the value didn’t drop, and in fact, has continued to increase every year. We really have been able to achieve peace of mind with this approach, and I strongly encourage everyone to look into it.”

I’m getting letters and emails echoing what Bill said every day, which is why I became convinced Americans have been brainwashed into believing they must accept risk, volatility and unpredictability to grow a sizable nest-egg.

Stay tuned, because I’m going to do a series of blog posts on why conventional saving, investing and financial planning methods don’t work… and what you can do about it.