Year of the Dragon Financial Makeover

Occupying the fifth position in the Chinese Zodiac, the Dragon is the mightiest of the signs. The Dragon is a creature of myth and legend, and a symbol of good fortune and sign of intense power. In Eastern philosophy, the Dragon is said to be a deliverer of good fortune and a master of authority.

People born in the year of the Dragon (1904, 1916, 1928, 1940, 1952, 1964, 1976, 1988, 2000, 2012, etc.) are said to possess such character traits as dominance and ambition. Dragons prefer to live by their own rules and are known to have free spirits. They are driven, unafraid of challenges, and willing to take risks. They are passionate in all they do and they do things in grand fashion.

So in the year 2012, let’s resolve to learn from the ways of the Dragon and make better financial decisions. Here is a step-by-step guide to help you get started:

1. Build a Budget. Start the year on the right foot by creating a realistic budget that you can live with. A budget is nothing more than a list of all your recurring expenses (e.g. utility bills, car payments, mortgage payments, insurance payments, etc.), and your income (rental income, salary, any part-time job). The most important number is the “net amount” that is left after all the expenses are paid. If your “net amount” is negative, then start identifying expenses that can be either reduced or eliminated. If the amount if positive, then consider saving more! 

2. Eliminate Your Debt. Make 2012 the year that you resolve to slay your consumer debt (i.e. credit cards!). Start by making a list of all of the credit cards on which you owe a balance, then sort the list by their APR from the highest to the lowest. This list is now your priority number one in 2012! Start by aggressively paying down the card that carry the highest APR and work your way down the list until your debt repayments become manageable. In the mean time, do not accumulate any more debt unless absolutely necessary. 

3. Establish a Emergency Savings Accounts. Once you have established a realistic budget and a manageable debt repayment schedule, the next step is creating an emergency savings account. Depending on your situation, and the reliability of your income sources, most Financial Planners recommend maintaining a 3 to 6 months “cash cushion” in case of a lay-off, accident, or unexpected home repairs. This portion of your money should be invested extremely conservatively and kept completely liquid. A good place to consider parking this money would be a bank savings account or money market fund.  

4. Fund Your Retirement. Now that you have established a budget, created a debt repayment plan and started building an emergency savings account, your next priority is to begin funding your retirement. You should always try to contribute the maximum amount into your retirement plans. But if you are not able to, and assuming your company offers a 401K match, you should contribute at least enough to the plan to take full advantage of the match. If your work does not offer a 401K option, then you should consider funding either a Traditional IRA or Roth IRA, depending on your tax situation. The “rule of thumb” on retirement can be summarized into one sentence – start saving as much as you can, and as early as you can!

Make sure you write down your money goals and review your progress on a regular basis. Even incremental improvements in your finances today can produce big rewards down the road. I wish all of you a great 2012 and may the year of the Dragon bring you a year of prosperity, health, and happiness!