(MONEY Magazine) – Energy costs. Interest rates. Home prices. Sure, the year ahead poses challenges. But it also holds great opportunity--if you know where to look. What follows is a two-part user's guide to a prosperous 2006. Starting on page 106, you'll find more than 30 ways to boost your savings, get the best deals and protect your family's future. But first, learn what to expect from the new year and why it could be a lot better than today's headlines would have you believe.

Call it the hangover economy. After the stock market bubbly went flat more than five years ago--has it really been that long?--and a recession followed, you knew it was going to take time for you to feel good again. In fact, the slump was brief, the job market is decent, and the economy will have grown more than 3% in 2005. But jeez, it's hard to shake the blahs. A good raise? As if. Stocks are sluggish, and gas prices have you remembering what real inflation felt like. You're not the only one feeling a little blue. Just 25% of Americans think the economy is getting better as we head into 2006, according to a recent Gallup poll. Under the circumstances, though, this is actually good news.

It's when everyone's thrilled that you have to worry. Consider that consumer sentiment stats soared in the months before the 2000 Nasdaq crash; and they were low in 1991, just before the historic boom. Of course, it doesn't necessarily follow that another big party is on the way, but it's worth remembering that low expectations can create opportunity, especially if you're looking for reasonably priced stocks. And frankly, lowered expectations wouldn't be bad for the housing market. An easing of price increases would help people in places like San Diego and Boston buy a home without leveraging themselves to the hilt.

In short, there's every reason to believe you can get ahead in the coming year. In the story that follows on page 106, "What You Need to Do," you'll see how to get the most out of your portfolio, your home, your spending and your career. But you'll also learn how to hedge your bets. Although the immediate economic risks look manageable and most forecasters expect the economy to keep expanding in 2006, there are some long-term problems that we'll all be tangling with for a while. Despite their gloomy mood, most Americans still aren't acting like they expect a rainy day. The nation's personal savings rate is basically zilch. The whole country is overextended--just look at those huge budget and trade deficits, which we've been able to afford thanks to generous (for now) financing from China, Japan and others. We're a bit too vulnerable to any sort of bad news.

So what to do in 2006? Go against the grain. Save like you're worried, but be optimistic enough to seize opportunity. And keep an eye on energy prices, inflation, real estate values and finally--yes, it still matters--the stock market.

ENERGY PRICES

Relief at the Pump but Not at Home

Even if you drive a hybrid, energy prices are going to be a big part of your life in 2006. Gas hit $3 a gallon in a brutal hurricane season. The age of cheap gas isn't coming back soon, but we may have seen the worst of the spikes. Prices have declined recently as the oil industry recovers from hurricane damage. Also, demand may slacken if we continue trading in SUVs for compacts. That won't be the only adjustment you'll make in the coming year. Think sweaters.

"Around the end of November, people may be getting their first real cold-weather heating bills, and they could be 50% higher," says Sarah Emerson of Energy Security Analysis. Heating oil costs are up, and natural gas prices have jumped 50% in a year. High natural gas prices in particular may be with us for a while. Until recently, North American supplies easily kept pace with demand, says Neal Schmale, chief financial officer at Sempra Energy. No longer. And though there's still plenty of gas overseas, the stuff needs to come in through special terminals, which take time to build and often aren't popular with their would-be neighbors. Emerson warns that some consumers will feel a "triple whammy"--first gasoline, then heating costs, then electric bills. In places where power plants use natural gas, including New England and Southern California, utilities are talking about increases of 10% to 30%. Nationally, though, electricity prices will rise less because much of the country's juice comes from coal or nuclear power.

Spending more on driving and heating and powering your plasma-screen TV means spending less on everything else. It may even mean you'll pass on the TV. This should put a damper on the economy. But energy costs could also trigger a return to spiraling inflation. Any company that's spending more on its own energy costs will try to pass those costs on to customers if it can. FedEx is doing so, for example. How big is the risk of inflation? It depends, in part, on wages--and there the bad news and the good news are jumbled together.

INFLATION

Why This Isn't the 1970s

Companies may like the idea of passing higher costs on to their customers, but they won't get far if people don't have more money to spend. That's where the question of wages comes in. Overall, employers' wage costs grew just 2.3% over the past year, the slowest growth rate on record. The HR consultancy Hewitt Associates expects salaried workers to bring home 3.6% raises on average in 2006, based on surveys of employers. That compares with a 4.3% gain during boom years.

Of course you want your wages to grow. And you are quite entitled to complain that, as Sylvia Allegretto of the liberal Economic Policy Institute observes, this corporate stinginess has come at a time when the economy and worker productivity have been growing. But a raise isn't worth much if it comes with inflation, which not only raises prices but erodes your savings. And at the moment, it looks as if the same forces that are holding your pay down are also keeping inflation at bay.

"Your employer's not going to give you a raise just because your home heating bill is going up," says Morgan Stanley economist Stephen Roach. In contrast to 30 years ago, you are pretty unlikely to have a union contract that guarantees automatic wage increases as prices rise. And your company is far more likely to face competition from low-cost overseas producers. Psychology is at work here too. After years of low inflation, observes Lehman Brothers economist Ethan Harris, "people are no longer used to the idea of demanding cost-of-living increases." Companies, likewise, no longer expect competitors to raise prices and so are reluctant to do so themselves.

But that psychology, Harris adds, is a bit more fragile now; surveys show that consumers are expecting higher prices, and in this game, anticipation shapes reality. Disco-era price spikes aren't coming, but you should prepare your portfolio and your savings strategy for higher, though manageable, inflation. (We've got the specifics on how to do this on page 108.) You should also figure that presumptive Federal Reserve chairman Ben Bernanke will keep hiking interest rates to try to nip inflation in the bud. Which brings us to your biggest investment: your house.

REAL ESTATE

Time to Take a Break?

If you're feeling richer these days, you probably have your real estate to thank for it. Runaway home values on the coasts and in the Southwest mean more than paper profits; they've also given people huge amounts of equity to borrow against to keep on spending. There's anecdotal evidence that some markets may be cooling, but there's still plenty of speculation out there. Lehman's Harris points to the fact that condos are hotter than regular houses in some towns. "You can tear down a small building and build a bigger one and triple the number of condos, but you can't triple the size of land," says Harris. "So it's the land"--in other words, houses with yards--"that should be more valuable." But speculators like condos because the hassle and cost of getting in are lower than for buying a house. In other places, home prices seem to be reaching the limits of what locals can afford. PMI Mortgage Insurance, a company that insures home mortgages against default, calculates that Boston, Long Island, Orange Country and San Diego face fifty-fifty odds of a price drop.

How much should you worry about this? High energy costs and slower growth should mean milder home-price gains at best, and maybe even slight declines. But big price drops are generally the result of major shocks, such as the wave of unemployment that hit California in the early '90s. "It's tough to see a traditional factor that would create a rapid pullback," says market researcher Nicholas Buss of PNC Real Estate Finance.

Yet Buss concedes that we're sort of in uncharted territory here, with a market that seems to be driven in large measure by truly historic cheap mortgages. "We've been stuck at low rates for such a long period of time now that it isn't going to take much to get a reaction," Buss says. "When we get to fixed rates of 6.5%, it will be noticeable. If we get to 7%, it will be very noticeable." At 7%, the mortgage on a $350,000 house with 10% down will cost a buyer about $150 more a month than at today's average rate; that means it will be tougher to sell that house for $350,000. Rising rates will have an even bigger impact in such markets as California, where many new buyers have been taking out adjustable-rate or interest-only loans. So 2006 looks like a bad year to stretch to buy more house. But if you have a mortgage you can afford even as rates rise, and you don't plan to move soon, you'll be fine--home prices don't decline nearly as sharply as stocks do, and in the meantime you have a nice place to live.

THE STOCK MARKET

Why Bother? Here's Why

So this is the basic picture: A somewhat slower economy, weighed down by higher energy prices. A steady, but probably not shocking, increase in interest rates. The bearish scenario? Energy prices rise fast enough--or real estate falls far enough--to threaten a full-on recession. This probably doesn't sound like the most exciting time to be a stock investor. But ignoring the market could be a huge mistake; you make your money by buying when most folks aren't interested. As Michael Sivy argues on page 77, the stock market is really coping with a 2000 hangover, and plenty of big, solid stocks out there look reasonably cheap today.

That brings us to the bullish scenario. "A slowdown for the economy is not necessarily bad for stocks," says economist Nancy Lazar of the ISI Group. "In fact, it can be good." Remember, the market looks forward. Right now, mildly discouraging news for 2006 seems factored into share prices. But if the economy grows enough to keep unemployment low, yet stays tame enough to allow the Fed to stop worrying about inflation and ease up on rates, the stage will be set for a much stronger 2007. In that case, the market might pick up well before the calendar turns again. Bottom line: Diversify, but stay in the game. Being prepared means being ready for the good stuff too.