With each change in your professional or family circumstances, you should review your financial situation. These are good opportunities to take a fresh look at your progress to date and plan for the future.
Get in the habit of doing annual reviews. If you elect to work with a financial advisor, she should initiate these annual examinations. If you’ve decided to do-it-yourself, make time—with your partner if you have one—to sit down together and ensure your plans are on track.
Track your net income over time. Figure 8 tabulates hypothetical income, expenses, and net income numbers. Those are graphed in Figure 9. Initially, it’s assumed the wage-earner is a resident earning $60,000 annually. In the second year the individual begins her first real job, with annual earnings of $200,000. Over the next few years, wages increase modestly. In the year 2021 a larger increase in income arises due to a promotion. We assume this household maintains spending discipline such that expenditures never exceed income, although for the first two years net income is zero. Net income of zero doesn’t mean investing for that year is zero. I’m assuming that retirement and children’s college plan contributions are in the annual budget, which means the household is accumulating assets continuously. A positive net income means there’s even more cash left over after all budgeted contributions have been made.
Figure 8: Hypothetical Income, Expenses, and Net Income
If you are on a healthy trajectory total income should show a steady rise. It’s okay for expenses to rise as long as the difference between them, the net income, remains positive. Ideally, total income rises while expenses rise minimally or even decrease. This means the household generates more excess cash each year, and that excess can be used to pay down debt early or invest more.
If you notice that your net income declines steadily, that’s a signal to examine expenses more closely. The biggest red flag is when net income is negative (total income declines below total expenses) as that means the household is not living within its means. Make changes in your spending habits to get back on track.