With inflation continuing to break records and reach 40-year highs, the value of the dollar isn’t going nearly as far as it used to. Many households are being forced to reevaluate their budgets and find ways to cut back spending to keep up with the rising cost of everyday items. If you’ve been taking a closer look at your financial situation, here are some ideas to help determine if your cost of living needs an adjustment.
Cost of living is the amount of money required to live in a certain area and cover all of your necessary expenses, like housing, food, health care, gas, taxes, entertainment, and education. This amount can vary greatly from city to city and maintaining your lifestyle on the same income can prove challenging if you move to a new location where the cost of living is higher. This total amount is also affected by how rural or urban your area is because it’s directly correlated to your housing, food, and energy costs. For example, living closer to farms or other food production may keep your food costs lower. Oftentimes, cost of living is tied to salary, meaning the higher the expenses are in an area, the higher the salary levels are in that region to maintain the standard of living.
Understanding your cost of living not only can help you live more comfortably but allows you to create an accurate budget and make decisions that better support your financial health. Each person’s cost of living is different. Calculate yours to get a realistic snapshot of your expenses by adding up all of your monthly expenses, including both necessities and non-essentials. If you want to get a general idea of your annual costs, multiply this monthly total number by twelve. There are several ways to reduce your cost of living and help get back in balance.
Individual factors like your family size, whether you own or rent a home, or commute to and from work all affect your cost of living. A general rule to help keep your costs in check is the 50-30-20 rule, which designates 50% of your income to your “needs” or necessities each month, 30% to your “wants”, and 20% to your savings or paying off debt. If your wants and needs are taking up too much of the total income pie, then determine ways you can cut back spending.
If considering moving to a new location, a good idea is to compare the cost of living of each place and determine what adjustments to your budget might be necessary. You can use a cost of living comparison calculator to estimate the difference in expenses between your current place of residence and the location you’re considering. As you look at the breakdown of expenses and the percent difference between the two locations, housing costs may likely be one of the most important factors to keep in mind.
Several factors influence how much you can afford to spend on housing, including your income, debt amount, credit profile, and the amount you have in savings. A general rule is not exceed 30% of your gross monthly income to cover housing costs. If you rent, this amount includes utility costs, and if you own your home, this should include your mortgage, homeowners insurance, utilities, and property taxes. For example, if you make $70,000 a year before taxes, generally you should spend no more than $1,750 a month on your housing.
As you take a closer look at your overall cost of living, you may want to determine if your current housing expenses match your current lifestyle and goals. If you would like to travel more or have extra income to put towards concerts or sporting events, you may want to determine ways to reduce how much you spend each month on housing. Since it is often your largest expense, this is where you can make the biggest impact to fine-tune your budget. If you’d rather invest in your home, you may want to look for other ways to reduce your spending and minimize how much is spent in the other areas of your budget.
Unfortunately, the cost of living is increasing around the world, with rising prices affecting nearly everyone. Some of the likely factors affecting this spike are climbing energy prices, supply chain disruptions, and high demands on limited supplies. While the effects of inflation are unavoidable, you can make adjustments to your budget and spending to help ease the financial strain.
As you review your budget, identify places where you can cut costs, even if it’s temporarily. Perhaps you can take advantage of remote work options that are available from your employer to cut back on transportation and vehicle costs, or incorporate weekly meal planning to reduce spending on restaurants or food delivery. By making adjustments, especially during these tougher periods, you may still maintain your savings, build an emergency fund, and work toward your future financial goals. Any sacrifices you make today can often have a lasting and positive impact tomorrow.