Our Outlook is Rosier – Now What?

Rising confidence doesn’t mean it’s time to open your wallet

In May, Reuters reported that consumer sentiment was at its highest levels since late 2007.  Those were the early days of the financial crisis, one that a recent Federal Reserve report determined had caused a nearly 40 percent decline in America’s median net worth.

So what are you to make of the Reuters news? If you’re one of the many Americans who tightened spending out of fear or economic reality, is it time to loosen up?

The answer, generally speaking, is no. Economic indicators–from unemployment to housing starts to hourly wages–have shown all the consistency and predictability of a toddler. And if the financial crisis taught us anything, it’s that a herd can quickly change direction. Follow it and you never know when you’ll get trampled.

Every situation is different, however, so it’s best to get a clear sense of your financial circumstances before feeling glum. Doing so requires more than checking your bank account balances and the value of your current investments; you must also take a look at your broader financial health. Here’s a simple guide to get you started.

Determine Your Net Worth

To do so, create a personal balance sheet. The document is no different than the financial statements prepared by companies and analyzed by investors considering buying the firm’s stock. In this case, consider yourself both the investor and the company.

A balance sheet gives you a current snapshot of your financial health, which is essential to making a short- and long-term plan. Putting one together is easy. Gather a list estimating the value of your assets (things like cash, your home, and cars you own outright) and the size of your liabilities (your mortgage, credit card debt, etc.). Enter them into a net worth calculator found on sites like CNNMoney and Bankrate. The difference between your assets and liabilities is your net worth (I hope it goes without saying, but you want the number to be positive!).

What qualifies as a “good” net worth depends on a number of factors, particularly your age and annual income. CNNMoney’s net worth comparison tool (http://cgi.money.cnn.com/tools/networth_ageincome/index.html) will give you a sense of how you stack up against others in your age and income brackets.

If your net worth is above the median in both scenarios, you can begin to feel more comfortable about your financial circumstances. But it isn’t the whole story.

Assess Job Security

Are you employed in an in-demand industry like health care or technology, or one with declining prospects such as manufacturing (or, dare I say, journalism)? Whatever your occupation, do your best to objectively assess your performance. Looking at a recent employee review will certainly help.

Calculate Your Fixed Expenses

A fixed expense is one that you can’t eliminate altogether (like food and housing), though you may be able to scale back. Put together a conservative estimate of what you can live on each month and weigh that against your income and savings. Everyone’s idea of “secure” is different, but you’ll have a good sense of where you stand.

Review Long-Term Goals

Is there anything missing from you financial overview? Maybe you’re not saving enough for your child’s education or for retirement. Gather up all those “should do’s” and add them to your fixed expenses. Review against your income and net worth.

Make a Decision

This process isn’t foolproof. Your personal “economy” can change quickly, much as the U.S. Economy did in 2007. Follow this guide and you’ll nonetheless be better prepared to make a reasonable assessment of your place in the financial order, and whether you have cause for optimism.

After all, it’s you–not your neighbor in the rose-colored glasses–who’s going to be paying your bills.

Matthew Malone is a staff writer for RothIRA.com, a leading retirement and Roth IRA resource. Matthew is also a contributing writer to CBS SmartPlanet. His work has appeared in The New York Times, Cosmopolitan, Smartmoney.com, Fortune.com, Forbes.com, and other publications.