The people who pay the bills may notice, but Americans as a whole don’t seem to pay much attention to the cost of living.
Far too often, the cost of living is an abstract concept that householders recognize they need to address, but often never do.
What is the cost of living? This is the total amount of cash a household needs to cover basic home, career and lifestyle needs.
Any living expenses list can include a mortgage or rent payment, a loan on a vehicle, health care costs, and food and utilities.
Beneath the surface, the cost of living can also include additional household expenses, such as filling the gas tank, paying for a babysitter and a round of golf at the local public course, among other day-to-day expenses.
Cost of living indices are also used by private and public enterprises for the general good.
“Employers use the cost of living indexes to determine wages, while government organizations use them to determine the need for measures such as annual adjustments to Social Security benefits,” Credit Summit said in a new report on the cost of living in the U.S.
“These measures are also used by people who are considering moving, especially for employment reasons.”
What makes up the bulk of living expenses?
In 2020, the average annual cost of living stood at $61,334, the Credit Summit report noted. (The US cost of living varies from state to state. For example, it is much higher in California than in Mississippi.)
That cost-of-living average appears to be significantly higher as 2023 approaches, financial experts report.
“Since the beginning of 2021, energy prices, such as electricity, gas and other fuels, have been the primary driver of rising inflation,” said Lyle Solomon, principal attorney at Oak View Law Group in Jersey City, NJ.
“Many Americans saved during the pandemic due to financial support and the fact that covid-19 closed businesses and encouraged people to stay home rather than spend money on the services they used to use.”
But that financial cushion is shrinking as consumer goods and services become more expensive due to inflation, global supply chain problems and higher interest rates.
“As a result of especially increased inflation rates, Americans’ savings will not go as far in 2022,” Solomon said. “In addition to affecting the value of savings accounts for those who have saved for an emergency or retirement fund, rising prices may be a more prominent source of discomfort.”
The Credit Summit’s cost of living report points to five particularly steep expenses, and lists their average annual costs for American households:
Housing-related expenses (other than rent or mortgage): $2,838
Those prices will go higher unless inflation is moderated.
Inflation in the US was the 13th highest among the 44 nations analyzed in the first quarter of this year, averaging 8.6%, according to the US Bureau of Labor Statistics.
“Furthermore, in the United States, the inflation rate for the first quarter was almost four times higher than the same period in 2020,” the Credit Summit report noted.
US inflation is currently running at an annual rate of 7.7%.
Traditional big-ticket items such as housing, transportation and food remain the top three expenses for most households in 2022.
“These three categories can consume a significant portion of your earnings,” Solomon said. “Housing in particular is becoming increasingly expensive due to inflation, and this is the most serious issue for many American households.”
Transport is cheaper than housing, but rising gas prices have also put pressure on people’s finances. Energy prices rose significantly in 2022 before easing somewhat in November.
Food costs are on the rise, and this is a problem for low-income American households.
“Food costs in the United States are actually not that expensive,” Solomon noted. “However, this can be a significant issue for low-income households. If you don’t make a lot of money, takeaways as well as healthy food can make up a large part of a household’s food budget.”
Get a leg up on living expenses
Americans struggling to keep up with the cost of living should take a step back, assess the situation, and use the financial management tools available to tackle these issues.
“It is critical that households create a budget based on monthly earnings,” Solomon advised. “Tracking your expenses is an effective way to change your spending habits, but it can become overwhelming if you have a large number of payments to make.”
It’s also a good idea to use personal finance mobile apps like Mint, Personal Capital or Goodbudget to get a firmer handle on income and spending.
“With the right app, you can make better financial plans and save more money for what matters,” Solomon said.
Heads of households must also focus on wants versus needs to control cost of living expenses.
“You have to feed yourself (buy groceries), but eating out is a need,” says founder Jay Zigmont at money management firm Childfree Wealth in Water Valley, Miss. “To keep a roof over your head is a need, and to have a nice house is a need.”
If these big-ticket items are holding you back, make an equally big decision to get them under control.
“It might be time to downsize from an expensive house or rent something further from the city, especially if you work remotely,” Zigmont told TheStreet. “If you’re married or living as partners and working remotely, it might be time to cut back to one car.”
“The bottom line is that everyone needs to be on a budget and be mindful of their spending,” Zigmont added.
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