People who pay the bills may notice, but Americans as a whole don’t pay much attention to the cost of living.
Too often the cost of living is an abstract concept that household heads acknowledge they need to address but often don’t.
What is the cost of living? It is the total amount of cash a household needs to meet basic household, career and lifestyle needs.
Any living expense list might include a mortgage or rent payment, a loan on a vehicle, health-care expenses, and food and utilities.
Beneath the surface, living expenses also include ancillary household expenses such as filling the gas tank, paying for a babysitter and a round of golf at the local public course, among other everyday expenses.
Cost of living indices are used by private and public enterprises for the common good.
“Employers use cost-of-living indexes to determine wages, while government agencies use them to assess the need for measures such as annual adjustments to Social Security benefits,” Credit Summit said in a new report on the cost of living. US
“These measures are used by people considering relocation, especially for employment reasons.”
What makes up most of the cost of living?
In 2020, the average annual cost of living was $61,334, according to a Credit Summit report. (US cost of living varies from state to state. It’s higher in California, for example, than Mississippi.)
That cost-of-living average will increase significantly as 2023 approaches, financial experts report.
“Beginning in early 2021, energy prices such as electricity, gas and other fuels will be the primary driver of rising inflation,” said Lyle Solomon, principal attorney at Oak View Law Group in Jersey City, NJ.
“During the pandemic many Americans saw financial aid and Covid-19 suspend businesses and prompt people to stay home instead of spending money on services they previously used.”
But that financial cushion is shrinking as inflation, global supply-chain problems and high interest rates make consumer goods and services more expensive.
“Especially because of increased inflation rates, Americans’ savings are not going away in 2022,” Solomon said. “In addition to affecting the value of savings accounts for those saving for an emergency or retirement fund, rising prices are a major source of discomfort.”
Credit Summit’s Cost of Living Report identifies five particularly sharp costs and their average annual costs for US households:
Housing-related expenses (beyond rent or mortgage): $2,838
Unless inflation is curbed, those prices will rise.
According to the US Bureau of Labor Statistics, inflation in the US was the 13th highest among 44 countries analyzed in the first quarter of this year, averaging 8.6%.
“Furthermore, in the United States, the first-quarter inflation rate nearly quadrupled from 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 substantial portion of your earnings,” Solomon said. “Housing in particular is becoming more expensive due to inflation and is a very serious problem for many US households.”
Transportation is cheaper than housing, but rising gas prices have also strained people’s finances. Energy prices rose significantly in 2022 before easing slightly in November.
Food costs are rising, and that’s a problem for low-income US families.
“Food costs in the United States are actually not that expensive,” Solomon noted. “However, this can be a significant problem for low-income families. If you don’t make a lot of money, takeout and healthy food can make up a large portion of a household’s food budget.
Getting a leg up on cost of 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’s critical that households create a budget based on monthly earnings,” advises Solomon. “Tracking your expenses is an effective way to modify your spending habits, but it can become overwhelming if you have a large number of payments to make.”
It’s 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’s important,” Solomon said.
The head of the household must also be mindful of the need to control the cost of living.
“You have to feed yourself (buy groceries) but going out to eat is a desire,” said Jay Zygmont, founder of money-management firm ChildFree Wealth in Water Valley, Miss. A good home is needed.
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 or rent something far from the city, especially if you work remotely,” Zygmont told TheStreet. “If you’re married or living together as a partner and working remotely, it may be time to switch back to a car.”
“The bottom line is that everyone needs to be on a budget and watch their spending,” Zygmont added.
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