Money Managing Matters: Three Dos, Don'ts for Your Finances

July 17, 2008 — -- The nation's economic turbulence has many consumers fretting about their personal finances. With tightening budgets across the country, most people are interested in how to get the most for their money, and want to know what they actually should be doing with their dollars.

Fox Business Network host Dave Ramsey explains the money dos and don'ts. He says, "Winning at money is 80 percent behavior and 20 percent head knowledge."

Here is some advice on how to make your money work for you and what pitfalls to avoid.

If things are tight, pay your essential bills first before you pay your credit card or student loan debt. Necessities are things like shelter, which include rent or mortgage, food, clothing and transportation to and from work. No matter what happens to the economy, these are the things you need to keep yourself going to live another day.

Then use whatever is leftover to pay your debts. Pay your smallest debts first. The reason for that is as much psychological as financial. If you focus on the big debts first, it's just going to demoralize you. When you pay off the small store credit card, it motivates you. Take small doable steps to get yourself out of debt.

Another way of looking at the stagnant economy is that stocks are on sale. You want to keep investing in the market long-term.

If you're not retiring today, you want to keep investing because, over the long term, the market does go back up. There's no way to time it so that you invest at the bottom of the market. Obviously, you need to remain diversified. You need to put your money into more than just one stock or mutual fund and don't worry about it every day.

If you have an adjustable rate mortgage, refinance into a fixed rate one. Interest rates on adjustable rate mortgages are only going to go up, and fixed rates are still relatively low.

If you are in a good position to buy a house -- if you don't have much debt and have money for a down payment -- now is a good time to buy. In many parts of the country, sale prices are low.

It is tempting to borrow from yourself. But if you take money out of your 401(k), you're losing out on the power of compound interest. Even a relatively modest loan can cut your savings dramatically.

For example, a $5,000 loan from your 401(k) could cut retirement savings by 22 percent. This is assuming you have a $40,000 salary and are five years into a 35-year career.

You'll have less savings when you retire and you also may have to pay penalties and taxes on the money. There's a limited time under the rules -- typically five years -- to pay it back without a penalty.

In this economy, now is not the time to borrow on your retirement money. You may have to change jobs, and in that case, you only have 90 days to put that money back in your 401(k). So, the risk is not worth it.

Don't medicate your stress by spending.

When people get stressed, they often shop. A recent study found that 50 percent of Americans are planning to buy a flat screen or HDTV this year. Not all of those people can afford it. It can feel good to buy stuff. Don't fall into that trap.

A lot of people this week are panicked. Your bank is not going out of business. A few banks may be in trouble, but 99 percent of banks in this country are perfectly fine.