People who pay the bills may notice, but Americans in general don’t seem to pay much attention to the cost of living.
Too often, the cost of living is an abstract concept that household leaders recognize they have to deal with, but often never do.
What is the cost of living? It is the total amount of cash a household needs to cover basic home, career and lifestyle needs.
Any list of living expenses can include a mortgage or rent payment, a vehicle loan, health care costs, food, and utilities.
Below the surface, the cost of living can also include additional household expenses such as filling up the gas tank, paying for a babysitter and playing golf at the local public course, among other everyday expenses.
Cost of living indices are also used by private and public companies for the common good.
“Employers use cost-of-living indexes to set wages, while government agencies use them to gauge the need for measures such as annual adjustments to Social Security benefits,” says Credit Summit’s new cost-of-living report. United States
“These measures are also used by people who are considering moving, particularly for employment reasons.”
What makes up most of the cost of living expenses?
In 2020, the average cost of living was $61,334, according to the Credit Summit report. (The cost of living in the US varies from state to state. California, for example, is much higher than Mississippi.)
That average cost of living appears to be significantly higher heading into 2023, financial experts report.
“Since the start 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, New Jersey.
“Many Americans had saved during the pandemic, thanks to financial support and the fact that Covid-19 brought businesses to a standstill and encouraged people to stay at home instead of spending money on services they previously used.”
But that financial cushion is shrinking as consumer goods and services become more expensive due to inflation, global supply chain issues and higher interest rates.
“Especially with elevated inflation, 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 can be a more significant source of discomfort.”
Credit Summit’s cost-of-living report identifies five particularly large expenses and their average annual cost to U.S. households:
Housing-related expenses (excluding rent or mortgage): $2,838
These prices will rise unless inflation is reduced.
According to the US Bureau of Labor Statistics, US inflation was the 13th highest among the 44 countries analyzed in the first quarter of this year, averaging 8.6%.
“Furthermore, in the United States, first-quarter inflation was nearly four times higher than the same period in 2020,” the Credit Summit report said.
US inflation is currently 7.7% per year.
Traditional supermarket items such as housing, transport and food will remain the top three expenses for most households in 2022.
“These three categories can eat up a large portion of your income,” Solomon said. “Inflation, in particular, is driving up the cost of housing, which is the most pressing issue for many US households.”
Transportation is cheaper than housing, but rising gas prices have also put a strain on people’s finances. Energy prices rose significantly in 2022, but fell slightly in November.
Food costs are rising, and that’s a problem for low-income US households.
“The cost of food in the United States is actually not that expensive,” Solomon noted. “However, this can be a significant problem for low-income households. If you don’t earn a lot of money, a large part of the household food budget can be on take-out as well as healthy food.
Get rid of the cost of living
Americans struggling to keep up with the cost of living need to step back, take stock, and use the financial management tools available to address these challenges.
“It’s important for households to budget based on monthly income,” 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 is also recommended to use personal finance mobile apps such as Mint, Personal Capital or Goodbudget to keep a tighter control over income and expenses.
“With the right app, you can create better financial plans and save more money for the things that matter,” Solomon said.
Household managers should also focus on wants rather than needs to control cost-of-living expenses.
“You have to feed (groceries), but going out to eat is a desire,” said Jay Zygmont, founder of money management firm Childfree Wealth in Waterleigh, Miss. “You have to keep a roof over your head. A nice house is a desire.”
If these big items are holding you back, make an equally important decision to get them under control.
“It might be time to downsize an expensive house or rent something further out of town, especially if you work remotely,” Zygmont told TheStreet. “If you’re married or living together as a partner and work remotely, it might be time to give up one car.”
“The bottom line is that everyone should have a budget and think about their spending,” Zygmont added.
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