Those who pay the bills may notice, but Americans as a whole 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 admit they need to address but often never do.
What is the cost of living? It is the total amount of money a family needs to cover basic household, career and lifestyle needs.
Any list of living expenses might include a mortgage or rent payment, a vehicle loan, health care costs, and food and utilities.
Beneath the surface, the cost of living can include ancillary household expenses, such as filling the gas tank, paying for babysitters, 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 common good.
“Employers use cost-of-living indexes to determine wages, and government organizations use them to assess the need for measures such as annual adjustments to Social Security benefits,” said Credit Summit, in a new cost-of-living report in the US
“People who are considering relocation also use these measures, especially for employment reasons.”
What is Majority of Cost of Living Spending?
In 2020, the average annual cost of living was $61,334, the Credit Summit report noted. (The US cost of living differs from state to state. It is much higher in California, for example, than in Mississippi.)
That average cost of living appears to be much higher as 2023 approaches, financial experts report.
“Starting in 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.
“Many Americans have been saved during the pandemic because of financial support and because covid-19 has closed businesses and encouraged people to stay at home rather than spend money on services they used before .”
But that financial cushion is diminishing as consumer goods and services become more expensive due to inflation, global supply chain problems, and higher interest rates.
“Especially because of rising inflation rates, Americans’ savings are not going as far as 2022,” Solomon said. “In addition to affecting the value of savings accounts for those saving for an emergency or retirement fund, rising prices can be a more significant source of discomfort.”
The Credit Summit’s cost of living report focuses on five very expensive expenses, and cites their average annual costs for US households:
Health care: $5,177
Housing-related expenses (beyond rent or mortgage): $2,838
Those prices will go higher if inflation is not affected.
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 nearly 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 are still the top three expenses for most households in 2022.
“These three categories can eat up a large portion of your earnings,” Solomon said. “Housing in particular is becoming more expensive due to inflation, and is the most pressing issue for many US families.”
Transportation is cheaper than housing, but rising gas prices have also put a strain on people’s finances. Energy prices rose significantly in 2022 before easing somewhat in November.
Food costs are rising, and that’s an issue for low-income US families.
“Food costs in the United States are actually not that expensive,” Solomon noted. “However, it can be a significant issue for low-income families. If you don’t make a lot of money, going out and eating healthy can be a big part of the family food budget.”
Cost of Living Advances
Americans struggling to keep up with the cost of living need to take a step back, assess the situation, and use the financial management tools available to address these issues.
“It’s critical that families create a budget based on monthly earnings,” Solomon said. “Tracking your expenses is an effective way to modify your spending habits, but it can be 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 grip on income and spending.
“With the right app, you can make better financial plans and save more money for what’s important,” Solomon said.
Household leaders should also focus on wants versus needs to control living expenses.
“You have to feed yourself (buy groceries) but going out to eat is a big deal,” said Jay Zigmont, founder of money management firm Childfree Wealth in Water Valley, Miss. A nice house is needed.”
If you’re holding onto these big-ticket items, make an equally big decision to get them under control.
“Maybe it’s time to downsize an expensive house or rent something further from the city, especially if you’re working remotely,” Zigmont told TheStreet. “If you’re married or living together as partners and working remotely, it might be time to cut back on one car.”
“The bottom line is that everyone needs to be on a budget and pay attention to their spending,” Zigmont added.
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