7 steps to get your finances back on track

(Money Magazine) -- Finally, the Great Recession seems to be fading into the distance. The economy grew at a robust 5.9% in the last quarter of 2009. The stock market, while no longer on a tear, is still up about 70% over the past year. And the Fed recently raised its short-term lending rate to banks, a signal that Ben Bernanke & Co. think the financial system is on the mend.

But if you're feeling like your own fiscal recovery is still pretty far off, you're not alone. In February consumer confidence took a tumble: By one gauge, consumers' assessment of current conditions, it was at its lowest level since 1983.

Meanwhile, a recent poll by Harris Interactive found that half of Americans don't expect their financial situation to improve in the next six months, and 30% expect it to worsen -- about the same number who felt that way a full year ago.

"People are still very spooked," says Columbus, Ohio, financial planner Jill Gianola.

Granted, you've got reason to remain rattled by the events of the past few years. Your job may still feel anything but secure; your home equity isn't the financial cushion it used to be; and your 401(k) statements, while less painful to open, show balances far lower than where you thought you'd be at this point.

But the way your brain is hard-wired is compounding the problem. That's because, as numerous studies by behavioral finance experts show, you are naturally programmed to view things as worse than they really are -- and that perspective can prevent you from taking the actions needed to get your finances back on track.

To take control of your money in these still tough times, you have to figure out how to conquer the emotions that hinder you from making the smartest decisions and devise a concrete action plan to help you achieve your goals. Below are seven ways to do just that.

The worry: The broad consensus among economists is that the recession ended in the middle of 2009. Yet in a February survey by Gallup, about half of Americans said they thought the economy was getting worse, only slightly less than the number who felt that way six months earlier.

Why the disconnect? Put part of the blame on a psychological phenomenon finance experts call "recency bias" -- the tendency to believe that what happens in the future will look a lot like what happened in the recent past. Today two straight years of bad economic news is coloring your take on the economy, leading you to gloss over positive news and focus on the gloomier headlines you see.

Plus, because of the complex way our brains comprehend risk, it takes far more good news to build our confidence than it takes bad news to destroy it, notes University of Oregon professor Paul Slovic.

In one study on risk perception, Slovic showed people fake headlines, some reassuring and some dire, about a nuclear power plant near their home. The good headlines only raised the subjects' trust in the power plant slightly, but the bad headlines had a huge negative impact. "In the past few years we've seen a lot of things that caused us to lose faith in institutions that we'd like to be able to trust," Slovic says. "These feelings tend to override our ability to analyze things in a logical way."

The fix: Don't fret about what the economy will do next; it's a loser's game. Instead, calm your anxiety by making sure you're covered if bad stuff does happen.

• Boost your emergency fund.

Already got three to six months of living expenses in the bank? With long-term unemployment at a record high, many planners now suggest setting aside a year's worth of income, especially if you work in a troubled industry like autos or real estate.

• Tap the power of a Roth.

What if you're hard-pressed to come up with the extra cash? Redirect a portion of the money you're saving for retirement. Put only enough in your 401(k) to get the full company match; put the rest into a short-term bond fund in a Roth IRA. Unlike a 401(k), contributions to a Roth can be tapped without penalty in an emergency because you've already paid taxes on that money. But earnings withdrawn from a Roth before age 59½ will typically be taxed and hit with a 10% penalty.

• Cut out big-ticket money drains.

Like many families these days, you've probably already reined in spending. But the cutbacks people tend to make -- eating out a little less, say, or vacationing closer to home -- probably wouldn't make that big a difference to your financial stability if you were to lose your job.

So identify major expenses you could cut if your income were to take a big dip -- Do you need that second car? Is private school really necessary? -- since many laid-off workers who have found a new job lately have had to take drastic pay cuts (as have staffers at some downtrodden companies).

"Some of my clients are doing the same work for 15% less than a couple of years ago," notes Atlanta financial planner Mary Claire Allvine.

What if you go to all these measures and nothing bad happens? Hey, having some extra savings never hurt.

The worry: In a recent Gallup poll, three out of 10 Americans named unemployment as the biggest problem facing the country, the highest number since 1983. Having a big cash cushion will help tide you over if you're laid off, alleviating one source of anxiety. But you'll still have to find another position, and that feels like an especially tough task lately: The latest consumer confidence survey found that nearly half of all Americans now believe jobs are hard to get.

The fix: Act as if you're already job hunting.

• Do a hard-nosed assessment of the danger.

Be brutally honest with yourself: Are fewer high-profile projects coming your way? Has it been a while since your boss asked for your advice? The answers to these questions may reassure you -- or spur you to get your résumé in order and reach out to a few headhunters, ASAP.

• Expand your network -- before you need to.

A survey by the job-search site ExecuNet found that 73% of six-figure earners had landed their current position through personal contacts. But, says Herminia Ibarra, a professor of organizational behavior at the international business school INSEAD: "Most people are lousy at networking. They feel like they're trying to manipulate and put on a show."

Building relationships now, not after your job is already shaky, will help get rid of the awkwardness. Notes Ibarra: "Networking is easier if you aren't thinking the whole time, Can this person get me a job?"

Make it a priority to engage in a networking activity once a week. Go to an industry event; join a task force at your company; drop a friendly e-mail to an old colleague who now works for a competitor. And diversify your network, which will help you explore opportunities you may not have considered, says Ibarra. So sign up for that softball league and look for like-minded peers on a social networking site like Ning, which connects people based on common interests.

• Plot a career change, just in case.

Most people wildly underestimate how long it takes to make a drastic switch, says Ibarra. Brainstorm now about what your next act might be. Is there a healthier industry in which your job skills and experience would be applicable, a career path you've long fantasized about pursuing? Then try to put together a mental game plan about how you would pursue that second career, if need be -- for example, what course you would take to beef up your skills in a new area, or who you would call for an informational interview.

The worry: Thinking about all you should do to shore up your finances (make up for lost ground in retirement savings, expand your network, stuff cash into your emergency fund) is dizzying. Watch out -- puting too much on your plate at once is often a recipe for spinning your wheels.

The fix: Break the goal down into smaller tasks, which betters the odds you'll stick to it ("I'll exercise for 15 minutes twice a week" vs. "I want to lose 20 pounds").

• Automate.

"Save more" is a tough goal if you rely on willpower alone. Take the thinking out of the process by arranging to have an extra $100 a month automatically deducted from your checking account or paycheck and funneled into your IRA or savings account.

• Pick one expense to cut.

That's more effective than simply vowing to chop your monthly spending by 20%.

• Tell a friend.

Research shows you make better progress toward your goals if you feel you're being held accountable. So let family and friends know your plans. Or make a "commitment contract" on Stickk.com, which forces you to cough up cold hard cash if you fail to meet your goal.