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How to Be a Personal Finance Ninja

Updated on September 16, 2011

The current market stability has thrown people into a panic. You may be quick to assume that the sky is falling because the market has been dropping like crazy as of late but DON'T PANIC! Panicking is the first step toward taking action that could ultimately hurt your personal finances.

I'm no financial wizard but I'd like to share what I know about personal finance that will help you brave the economic storm and set you on a clear (but boring) path toward financial stability.

Step 1: Pay off your Debt

The first thing you should be focusing on, above all else, is paying off your debt such as student loans, car payments, mortgage and anything that is a 'bill' that keeps coming in each month. Obviously, you can't pay them all off at once so knock down the big things like credit card debt and the loans.

You want to knock out your debts as soon as possible because the longer you pay on them, the more you're getting charged for interests. For example, if you are paying off $2,000 over 10 years than you could end up paying nearly $3,000 - $4,000 in the long run because of high credit card interest. However, if you paid it off in half the time, you'd only have a fraction of the amount. The sooner you pay off the debt, the better.

Make the sacrifice today so you can be financially free tomorrow. You'll miss out on doing some fun activities like going out to eat but the thousands you save down the line are much more valuable than going out for the night.

Step 2: Build an Emergency Fund

Next, begin saving money for an 'emergency fund' which will cover any emergency situations such as car repair, that sudden visit to the doctor or an unexpected bill. The emergency fund should be able to sustain you for roughly six months.

What happens if you suddenly lost your job? Do you have money saved up to float you until you're able to get a new one? If not than you could be facing a lot of potential credit card debt to keep yourself afloat. Worse, if you're completely out on the limb, you're going to lose a lot of things, maybe your house, because you won't be able to pay the bills.

Create an emergency fund that will get you by for at least half a year; factor in your current bills and set that aside before you make any further investments - don't skip this step!

Note: Put this money into an FDIC ensured account to make sure that your money will be there in the event that the bank goes under.

Step 3: 401k and Roth IRA's

The next step, after your debt is paid off and emergency fund is setup, is to start investing in your 401k and Roth IRA (if your employer has one).

A 401k is a fund where you can deposit money and not have to pay taxes until you take it out; usually when you retire. Many companies may offer an 'employee match' which means they will put in as much money as you do. Try to max out your 401k by depositing the limit of $16,500 each year (then your employer would do the same).

After you've maxed your 401k contributions, begin adding money to your Roth IRA. You can contribute up to $5,000 each year to your Roth IRA which also gives you tax breaks. You'll be using your Roth IRA and 401k to invest (in the later section).

Once the IRA is maxed out, go back and keep investing as much money as you can afford into your 401k. To make the process easier, have your employer automatically withdraw your money from your paycheck so you're not even tempted to spend it.

Step 4: Invest in Stable Options

You will always see 'financial experts' and the glamour of stock brokers on TV. There are a lot of TV shows that sensationalize investing and you may look at investing as if it's some wild game where you can make millions overnight - GET OUT OF THIS MINDSET!

The best way to secure your financial future is to take the most boring route and that's through stocks and bond index funds. Select stock and bond index funds because they will diversify your income so when the stock goes down, your bonds generally go up; you're being safe for the long run.

Don't chase the latest 'hot stock', 'gold and silver' or 'foreign currencies'. Don't get flashy. Stick with stock and bond index funds; they're extremely boring but they grow in time. If you don't touch them and invest early, you'll have hundreds of thousands of dollars by the time you retire - potentially millions depending on your investments and assets built during your lifetime.

Step 5: Don't Panic

Make a plan and stick to it. Don't just sit here and read this information - get active, today!

The longer you wait to invest, the more money you miss out on. If you started this process in your early 20's, you'll make a significant amount of money compared to someone starting in their 30's because of compound interest and gains.

The most important thing is to not panic. People are quick to withdrawl their money and jump on hot stock tips but this generally just results in people losing significant amounts of their investments when things turn south.

Don't be some hot shot stock broker doing million dollar deals. Be the boring financial ninja that has secured their future by playing the system.

Additional Resources

As I've said, I'm not financial wizard but I do know the importance of being educated, especially when it comes to personal finance. Having control over your financial destiny is incredibly rewarding because you'll no longer have the stress of "what am I going to do in life" when it comes to your finances - you no longer have the stress of debt and uncertainty.

The best approach to mastering your finances and becoming a ninja at your money is to read up and gain the education. Spend a few hours of this year figure how to understand finances and get started with this clear (and boring) guide to finances.

Do it now else you could be missing out on thousands of dollars in just a few years time. Don't panic. Have a plan and you'll win at the financial game.

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