7 steps to get your finances back on track

The worry: As stocks and home values declined by double digits, investors poured money into cash investments: The amount Americans held in savings accounts and money-market funds increased 18% between October 2007 and March 2009, according to the Leuthold Group.

In fact, fear of losing money is one of the greatest drivers of money decisions, according to behavioral finance experts. Research shows that when faced with choices that involve a certain amount of risk, we overwhelmingly choose small, certain gains over potentially larger but uncertain ones. Adds economist Tyler Cowen: "The idea of any loss at all matters more than the size of the loss."

Right now, the instinct to avert losses may be causing you to select overly conservative investments that can leave you even further behind in your goals.

A recent T. Rowe Price study compared two investors who had $10,000 in stocks at the end of 2006, and added $100 a month to their accounts over the next three years. The first investor avoided the worst of the market crash by selling his equity holdings in September 2008 and moving his portfolio and subsequent contributions into cash. The second investor stuck with stocks throughout the downturn. While he had lost considerably more than Investor No. 1 at the market's low point a year ago, by February of this year Investor No. 2 was in the lead, some $2,000 ahead of his skittish pal.

The fix: Being conservative is okay, but do it smarter.

• Ratchet down your equity holdings.

Done right, this approach may not reduce your long-term returns much. A portfolio invested 70% in large U.S. stocks and 30% in bonds and one invested 60/40 have both averaged gains of 11.1% a year over the past 30 years, says Ibbotson Associates; but the 60/40 mix had far fewer dramatic losses in the down years. The key to keeping returns relatively robust is to put the nonequity portion of your holdings mostly in bonds rather than cash.

• Get income you can rely on.

For older investors, creating a steady income stream is the key to staying calm during tough times, says Houston financial planner Tom Jackson. Research has shown that retirees who have a reliable income source (such as a pension) are happier than those who don't, even if the amount of money they have to live on is the same. No pension? An immediate annuity can serve the same function.

The worry: When the stock market was on a tear last year, checking your 401(k) balance every week (or day) seemed like a harmless pastime. Trouble is, the inevitable fear of losing money that results from watching the constant ups and downs of the market can lead you to make some less-than-ideal moves with your money.

Economist Richard Thaler, along with psychologists Amos Tversky, Daniel Kahneman, and Alan Schwartz, studied the behavior of a group of investors who looked at a hypothetical portfolio monthly vs. those who checked just once a year. At the end of the experiment, the investors were asked to make a final permanent portfolio allocation. The monthly checkers moved a large portion of their money into low-risk fixed-income funds; those who didn't watch the market regularly were far more likely to stick with stocks.

The fix: Set limits on monitoring your portfolio.

• Do quarterly checkups.

That, along with an annual re-balancing of your portfolio, is all you need, says planner Allvine. Checking more often just amps up your anxiety.

• Force yourself to take a breather.

Check your portfolio after the markets have closed for the day and tell yourself you'll reconsider in the morning, suggests planner Gianola. Or erase the saved passwords to your brokerage accounts on your computer and put those passwords in a separate room in the house from your office area. You'll be far less tempted to switch up your investment mix frequently if it takes some effort to actually make the move.

The worry: One reason you may be feeling so lousy about your money these days is that you're measuring your progress against a goal you created when the financial markets were at the peak of the last boom, says behavioral finance expert George Loewenstein.

It's a common phenomenon known as "anchoring," in which we create a standard against an arbitrary number. If, say, your 401(k) balance was $250,000 two years ago, you may have in your head that the "right" number for your 401(k) today should be higher, and feel disappointed that you don't have more even if the investments in your plan returned 30% last year.

The fix: Learn creative mental accounting.

• Rethink the buckets that you put money in.

Behavioral economists have found that we tend to think of money differently depending on its origin or our intention for its use. Most of us tend to place "found" money, such as a tax return or a bonus, in a separate category from our regular income and see it as cash that can be frittered away.

Conversely, we're less likely to spend money that must be pulled from a savings account, even one with no withdrawal penalties. So if you get a $5,000 tax return, tell yourself it's your annual raise, not a windfall -- and then use the money to bump up your Roth contributions.

Similarly, before you drop a few hundred on a fancy new espresso maker, ask yourself: If I had to withdraw this money from my son's college fund, would I still spend the dough?

The worry: If you feel like it's tougher than ever to manage your finances, well, that's because it is. "People are expected to take more responsibility for their finances, and they're increasingly complicated," says Davenport, Iowa, financial planner Eric Kies.

But research shows that trying to stay on top of too many details can impair your ability to make sound financial decisions. In one University of Minnesota experiment, two groups of students were told to write an essay on any topic; one group was also instructed not to think about a white bear. Afterward, each student got $10 and was told he could take it home or spend it at a nearby store. The students who were trying not to think about the white bear far outspent those given the less mentally taxing task.

The fix: Get rid of financial overlap.

• Pare down on plastic.

You don't need 14 credit cards -- two to four will do. Holding fewer cards also reduces the chances you'll miss a payment and get hit with a hefty late fee.

• Consolidate your accounts.

Roll old 401(k)s into a single IRA, and keep your investment accounts with a single brokerage. Getting one statement will make it easier to keep track of your assets and get a snapshot of your financial life. Maybe you'll find out you're doing better than you think.