Many of you might have been big fans of the show “Narcos” on Netflix. Especially the first two seasons. While Pablo Escobar was not exactly a model citizen and the way he earned his billions was in one of the worst ways possible, many of us envied his lifestyle. Who doesn’t want a private racetrack or partying in choice destinations? Great wealth is greatly seductive.

The two most practical ways to become wealthy are to either increase your income dramatically and invest in assets that earn for you or, to save more from your salary and over longer periods of time. Both of these paths should ideally lead to a point where the earnings or returns from the assets you own, outstrip your expenses. One seems super exciting, the other boring.

But as many sports stars, musicians, crime lords, or movie stars can attest, great income is no protection against a lifestyle your income can’t sustain. It really doesn’t matter if you earn higher than your peers, if you have a lifestyle that is grander than your money allows. Here are four signs that you are falling prey to this most common wealth creation mistake – having a lifestyle you really can’t afford. 

1. When you can’t find enough cash for a sudden expense that is at least 50% of your monthly income.

If you are earning a relatively high income and still find yourself literally living pay cheque to paycheque, then it’s a red flag. A quick way to check this is if you could come up with enough money to pay for something that is worth 50% or more of your monthly income without resorting to loans or credit cards.

There can, of course, be exceptions especially in metros where an income which is higher relative to most Indians can still mean living pay cheque to pay cheque due to high rentals and commuting costs.

emergency fund

2. When your “cash flow” is reducing month on month, or you find yourself unable to meet your savings target more than three months in a year, for reasons other than healthcare

If you find that each month, the amount left after expenses is going down rather than staying the same or going up, then this could be a symptom of spending more than what is safe. A good thumb rule is to save 30% of your income. This means that your expenses should not go beyond 70% of your income. 

If you are unable to save this much or at least 20% and miss this for more than three months, it would be a good idea to look at your expenses again. It’s not about compromising on fun, but more about not compromising with your financial safety and security.

A rising credit card bill could be an indication that your income is not enough to match your expenses forcing you to resort to credit cards more.

3. When your monthly credit card bill goes up more months than not

A rising credit card bill could be an indication that your income is not enough to match your expenses forcing you to resort to credit cards more. Sure, you could also be one of those who spend everything via credit card and then pay it in full each month. It’s not a problem then, but if you find that your credit card bills are more while your income is also getting drained then it’s time to review your expenses

4. When your debt obligations (EMIs) are over 50% of your take home

If you are paying more than half of your take home salary as EMIs then you are beyond the safety limit. The loan could be for your home but know that unless you have a good emergency fund, you are walking on thin ice. Ensure you bulk up your emergency fund as soon as possible.

Spotting these signs are the first step towards taking action and avoiding a significant pitfall, both financially and in terms of your quality of life.