People paying the bills may notice this, 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 admit they have to grapple with, but often never do.
What is the cost of living? This is the total amount of money a household needs to cover basic home, career and lifestyle needs.
Any cost of living list may include mortgage or rent, vehicle loan, health care costs, food and utilities.
Beneath the surface, the cost of living can also include incidental household expenses like filling up 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 companies for the common good.
“Employers use cost-of-living indices to determine wages, while government organizations 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 in the US
“These measures are also used by people who are considering moving, especially for employment reasons.”
What constitutes the bulk of cost-of-living expenses?
In 2020, the average annual cost of living was $61,334, the Credit Summit report notes. (The cost of living in the United States differs from state to state. It is much higher in California, for example, than in Mississippi.)
This 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 main driver of rising inflation,” said Lyle Solomon, senior counsel at Oak View Law Group in Jersey City, NJ.
“Many Americans had been saving during the pandemic through financial support and the fact that covid-19 closed businesses and prompted people to stay home rather than spend money on services they had 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.
“Because of high inflation rates in particular, Americans’ savings aren’t going that 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 greater source of discomfort.”
The Credit Summit Cost of Living report points to five particularly important expenses and cites their average annual costs for American households:
Health care: $5,177
Housing expenses (beyond rent or mortgage): $2,838
These prices will rise unless inflation is brought under control.
Inflation in the United States was the 13th highest among the 44 countries analyzed in the first quarter of this year, averaging 8.6%, according to the United States Bureau of Labor Statistics.
“Additionally, in the United States, the inflation rate in the first quarter was almost four times higher than in the same period in 2020,” notes the Credit Summit report.
US inflation is currently at an annual rate of 7.7%.
Traditional big-ticket items like housing, transportation and food remain the top three expenses for most households in 2022.
“These three categories can consume a significant portion of your income,” Solomon said. “Housing in particular is becoming more and more expensive due to inflation, and that is the most serious problem for many American households.”
Transportation is cheaper than housing, but rising gasoline prices have also put a strain on people’s finances. Energy prices rose significantly in 2022 before slowing somewhat in November.
The cost of food is on the rise, and it’s 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 problem for low-income households. If you don’t earn a lot of money, takeout and healthy foods can be a big part of a household’s food budget.
Get a head start on cost-of-living expenses
Americans struggling 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 essential for households to create a budget based on monthly income,” Solomon advised. “Tracking your spending is an effective way to change your spending habits, but it can get overwhelming if you have a lot of payments to make.”
It’s also a good idea to use personal finance mobile apps such as Mint, Personal Capital or Goodbudget to better control income and expenses.
“With the right app, you can make better financial plans and save more money for what matters,” Solomon said.
Household heads should also focus on wants versus needs to control cost-of-living expenses.
“You have to feed yourself (buy groceries) but going out to eat is a necessity,” said founder Jay Zigmont of fund management firm Childfree Wealth in Water Valley, Mississippi. “Keeping a roof over your head is a need, and having a nice house is a need.
If these big ticket 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,” Zigmont told TheStreet. “If you’re married or living together as partners and working remotely, it might be time to downsize to one car.”
“The bottom line is that everyone should stick to a budget and be aware of their expenses,” Zigmont added.
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