Australia may or may not be in recession - there won't be official word on that for a while yet - but there's no doubt the year ahead will be one of the most difficult many people have faced in nearly two decades.

Whether you're a young professional with a five-figure credit card balance, a home buyer no longer sure your job is secure or a retiree whose private pension fund is going backwards, it's time to clean up your finances.

Even if you're cashed up and secure, the very different economy this year means your financial arrangements may need dusting off too.

JPMorgan chief economist Stephen Walters says that after a decade running up debt, the party is over and many Australians will start the new year contemplating the messy state of their personal balance sheets.

"We're now entering a period where the desire will be to cut debt," he says. "For some, this will be forced upon them by job losses."

Walters suspects Australia's economy may prove to be in recession. He believes it contracted in the last three months of 2008 and will continue to go backwards in the first three months of this year - adding up to two consecutive quarters of negative growth, the technical definition of recession.

We won't know whether he's right until June, when national accounts data for the March quarter is released, but Walters says even if we avoid a recession it will still feel like one.

He says job losses are likely to extend from the financial sector into retailing, manufacturing and construction and house prices may have further to fall.

Yes, interest rates are lower and our mortgages less burdensome, he says, but we should still avoid the temptation to "leverage up" and instead ask ourselves questions such as "how secure is my job?" and "could I service my debts if the worst happened?"

The good news is Walters doesn't think any recession will be as long or as deep as the recession of the early 1990s - two quarters may be the extent of it. And others point out that low interest rates, cheaper petrol and falling consumer prices actually present an opportunity to get your house in order.

"We've got this extra cash and as families and as individuals we should be applying that in the right way to really get ahead," says Lisa Montgomery, head of consumer advocacy at RESI Mortgage Corporation.

"The saving people are making on their mortgages is in the vicinity of $500 to $700 a month. That's where the opportunity is.

"The thing people can do in the first couple of months of 2009 is to say: 'I'm going to clean my house financially.' "

Instead of spending disposable income it's time to scour away the grime and polish our finances - paying off debts, putting some aside and investing wisely to build long-term wealth.

Scrub up

Your finances may be in such a state that you can't even see what's beneath the dirt. So the first step is a budget.

You may know how much you earn but do you know how much you spend - and on what? Do your expenses match your income or do you have a deficit?

Look at your bank and credit card statements to see what they can tell you, accountants' body CPA Australia says on its website (cpaaustralia.com.au).

Financial services firm Superwoman Money is putting a money "calorie counter" on superwoman.com.au this year to help you keep track of spending.

"Work out how much you spend on coffees, even, and by the time you add them all up it's a huge amount," says general manager Sue Warren.

She says to identify where you can save cash, set some short- and long-term goals for that money and monitor your budget to ensure you're on track.

Be realistic when preparing your budget, she adds. If your "diet" is too strict, you'll just break out and binge.

Financial advisers say your budget should include savings for unexpected expenses or the proverbial rainy day.

One suggestion is to set aside 10 per cent of your income so you can build up a kitty that could sustain you for at least six months but preferably for up to two years.

This could take the form of cash savings in a high-yield account or money that eats away at the mortgage while it's in an offset account or available as redraw.

Eliminate debt

If your credit cards are out of hand, now's the time to put some elbow grease into getting the balance down.

You should ultimately aim to pay off your card in full each month, because you're now using it for convenience and not to fund spending you can't actually afford. Even better, switch to a debit card.

Credit card rates haven't fallen anywhere near as much as the official interest rate cuts, Montgomery says, so apply the savings you're making elsewhere to reduce this form of debt.

With credit card rates still as high as 20.5 per cent in some cases but mortgage rates at 6 per cent to 7 per cent, there's a strong case for pooling all your debt in one place - your mortgage.

"There could never be a better time to consolidate," Montgomery says. "But you have to be careful. If you're just going to consolidate debt and then take the mortgage back over 30 years and pay the minimum, forget it - you'll pay more over the longer term."

The way to make consolidation work is to keep paying the amount you were when the card debt was accruing interest at a higher rate, even though it's now on a lower rate in the mortgage.

And make sure you cut up your credit cards or you'll simply end up with a bigger mortgage plus credit card debt.

Dust off the mortgage

With mortgage rates down about 3 percentage points in the past six months and economists expecting a further 1 percentage point to 1.5 percentage point cut from the RBA, it's time to run your finger over your home loan to make sure it hasn't been gathering dust.

The cuts to the official cash rate haven't been matched point for point by bank and non-bank lenders. If your lender passed on less than its rivals, there's a better deal out there.

However, Montgomery says borrowers need to be on the lookout for wolves in sheep's clothing. A loan may have an attractive advertised rate - as low as 3.99 per cent in some cases - but could revert to an above-average rate after a honeymoon period. In addition, there may be a hefty application fee or onerous exit or "deferred establishment" fee if you want to pay the loan out early.

Some people may be considering switching to a fixed-rate loan at these low rates but with further rate cuts possible, now may not be the time to lock in - unless you need the certainty.

Even if you're happy with your existing lender, take the opportunity to clean up by making extra payments.

Mortgage specialist Resi had a look at what would happen if a borrower maintained the repayments that were being made on a $300,000, 30-year mortgage when interest rates were at their peak in August last year.

The average variable rate was 9.6 per cent and the monthly repayment was $2544. By December the average rate had dropped to 6.8 per cent and the required repayment to $1960, a saving of $584. Assuming there were no further changes, if the borrower kept paying $2544 the saving over the life of the loan would be $207,500 and it would be paid off 13 years and eight months early.

Buff up your investments

It's this sort of room to move that is the silver lining amid the bear sharemarket and economic slowdown, says John Dani of IPAC Securities.

"People who are younger and building wealth are in the fortunate situation where, if anything, they should be embracing current, depreciated sharemarket prices," Dani says.

"They should get a handle on how much they can realistically set aside each month and contribute into super, or into a managed fund, with the point of view that it doesn't matter where the markets are in 20 days or 20 weeks or even 20 months - it's where markets will be in 20 years' time that will be the real big opportunity for them."

People nearing retirement, on the other hand, will have experienced dramatic falls in their super balances and should be talking to their advisers about how this affects their plans.

The sharemarket slump makes transition-to-retirement pensions - the sort where you can keep working but draw a tax-effective pension - even more compelling for those aged 55-plus, Dani says. This is because of the tax treatment of pension money.

"When the investment recovery inevitably does occur, that recovery within super, within the accumulation phase, will be subject to capital gains tax," he explains. "However, if you were to transfer your super into a non-commutable allocated pension, the recovery happens in an environment that's tax-free."

And now might be as good a time as any to transfer shares to a spouse or partner on a lower marginal tax rate. That may mean crystallising a loss or having to pay CGT, he says, "but when these shares do recover they're better to recover in the name of the lower-tax-paying partner".

People already in retirement, who face the greatest stress and uncertainty amid falling markets, should avoid the temptation to switch everything into cash, Dani says. The worst thing this group could do would be to withdraw from the market, take the losses and then miss out on the inevitable recovery, he says.

At most, people who don't have a sufficient buffer of cash investments should switch to cash just the amount they need to sustain them for a couple of years.

And don't forget that falling asset values may mean you're now eligible for a part or full age pension and the seniors' concessions that go with that.

Centrelink regularly revalues the assets of people already on its books and adjusts pensions accordingly but if you're not in the system you'll need to make an application.

Too elastic with the plastic

Cash is king for Amanda Bennetts in the new year.

"My partner and I have gone into living off cash - credit cards are only to be used for the business," says Bennetts, who sells footwear from her Ravishing Wide Calf Boots website (www.widecalfboots.com.au).

"We're cooking most of our meals and cutting back our phone and Foxtel [pay television] packages.

"We've also had discussions about the financially bad choices we've made over the last 12 months. We've worked out some of our spending habits and we're taking action to change them."

Bennetts says she found she was getting into increasing debt with credit cards, partly because she always came home with more than she set out to buy.

"If I went into the store to buy a top, say, I would come out with two tops and matching pants, making a $30 purchase into a $150 one," she says

"I did this with clothes, whitegoods and when we bought a van I spent an extra $500 on extras like seat covers, GPS, matting - things we couldn't afford and didn't need.

"So my new year's resolution is to only buy one item when I go to the shopping centre."

She says that's much easier to do when it's actual cash you're handing over rather than a piece of plastic.

The tool kit

There are many aids, including our very own moneymanager.com.au, that can help you improve your financial situation:

* Prepare a budget using the planner available at the Federal Government's Understanding Money website at understandingmoney.gov.au/Content/Consumer/Tools/Planner.

* Plan goals for the year and work out how much you need to save to achieve them at understandingmoney.gov.au/Tools/Consumer/Calculators/Savings.

* Pay more than the minimum on your credit cards and see the interest you can save at infochoice.com.au/loans/home-loan/credit-card-calculator.aspx.

* Make extra repayments on your mortgage and see the results at mortgagechoice.com.au/calculators/extra-repayments-calculator.aspx.

* Compare debt consolidation with paying more off your existing loans at fido.gov.au/fido/fido.nsf/byheadline/Multi-loan+calculator?

openDocument.

* Check the best rates on home loans, personal loans, credit cards, insurance and bank accounts at infochoice.com.au and canstar.com.au.

* Find a better deal on your mobile phone at phonechoice.com.au.

* Do the sums on a transition-to-retirement pension at

clearview.com.au/ttr/retiresooner.

* Could you be eligible for the age pension? The Centrelink asset and income tests are explained at centrelink.gov.au/internet/internet.nsf/payments/age-pension.htm.

* Search for unclaimed money (from forgotten bank accounts, life insurance, shares, etc) at fido.gov.au/fido/fido.nsf/byheadline/Unclaimed+money+-+search+for+money?

openDocument.