Five steps to a prosperous 2012

2011 has been a shocking year for investors, with the All Ords Index down by around 15 per cent. And even those in cash are now seeing interest rates cut. Safe havens, it seems, are becoming harder to come by.

And that is likely to continue through 2012, with many investment banks and economists predicting a full-blown global recession this year as global growth dips under the 2.5 per cent threshold below which the world economy is considered to be contracting.

While Australia is among the most comfortable of the developed economies, this is not good news, and means demand for our key commodities will fall, interest rates will be cut further and unemployment is likely to rise.

And unless the turmoil in Europe is sorted out soon, a fierce credit crunch is likely to grow out of the European region, reducing the availability of capital for banks all around the world, including Australia.

Here's a good "to do" list for the new year.

1. PAY HIGH INTEREST DEBTS

Although it seems like a boring use of money, paying down high interest debts such as credit and store cards should be a number one priority. Rates are so high that making only the minimum payment each month is like throwing money down the drain. Do what you can to increase you payments to take bigger chunks out of the debt.

2. PLAN FOR EMERGENCIES

As a rule of thumb everybody should try and have an emergency fund containing as much as six months' salary, although this is likely to be too high for many people. Try and start saving something each week or month to build up that buffer fund to help you through any sticky patches where hours may be cut back or business dries up.

3. PRESERVE YOUR CAPITAL

With inflation at around 3 per cent, after-tax returns from savings accounts could easily be negative if you do not ensure you keep your money in one of the top paying accounts.

Term deposits are a good idea for 2012 given the likelihood of rate cuts throughout the year to stimulate the economy, but the best rates tend to be on instant access, internet-only accounts, which are paying over 6 per cent in many cases. It may be worth splitting your savings between the security of a fixed interest rate in a term deposit, and a variable, but higher rate in an instant access savings account.

Look at websites such as Moneyhound to find the best deals - it may well be that you can take a variable rate and still have room to absorb a couple of rate cuts instead of taking a lower rate on a term deposit. Do your homework.

4. REFINANCE

There are good opportunities to refinance your home loan in today's competitive market. A borrower with a $400,000 home loan only needs to achieve a 0.40 per cent saving on their home-loan rate, even taking account of $1,000 of switching expenses, to be ahead and saving money after just one year, and there a numerous deals offering savings of much more than this compared to lenders Standard Variable Rates.

The only reason to be paying over the top is apathy. And with almost everybody free from exit fees nowadays, the only expenses you need to worry about, as long as your loan is below 80 per cent of the property value, are valuation fees and a couple of other legal fees - but some lenders even cover these costs for you. The message is simple - switch to a better deal while you can.

For those with higher LVR loans, the situation is more complicated because of the need for Lenders' Mortgage Insurance, which can add thousands to your switching costs. Speak to a broker to see if switching makes sense in your circumstances.

The best deals on the market are from mutuals such as credit unions and building societies, although "prime" borrowers with big mortgages and lots of equity will often be given preferential "secret" deals by the banks, so if you fall into this category, see what one of the big four will offer you - word among brokers is that they will offer very generous rates for good customers.

5. DON'T PANIC

Although there are many gloomy predictions out there about the coming year, panicking won't make things any better. If you're young, don't worry too much about your Superannuation - there is plenty of time for it to grow and recover over the coming years. If you're older and approaching retirement, ask your adviser about the wisdom of taking some money out to hold in cash. Although the wisdom is selling out of the market at this point is questionable: it may well mean crystallising losses or incurring an unnecessary tax bill, so be as patient as you can. If Europe sorts itself out then a global recession may well be avoided and a recovery is likely to start later this year and accelerate in 2013, in which case shares will most likely rebound quite well.