Nov 18, 2022

When Is Your Cost of Living Too High?

Determining your living expenses and if they are too high may be challenging. To figure out if your cost of living is too high, you must understand the cost of living, how it affects your income, and how to use techniques to figure out if you are putting out too much bucks each month. So, how do we go about doing that? More in this blog!

When Is Your Cost of Living Too High?

The amount it costs you to maintain a comfortable standard of living is a key indicator of your financial strength. As the cost of living rises, people have less disposable income to set aside for future needs like emergencies or even their future savings account aka retirement.

Determining your living expenses and if they are too high may be challenging. To figure out if your cost of living is too high, you must understand the cost of living, how it affects your income, and how to use techniques to figure out if you are putting out too much bucks each month.

 So, how do we go about doing that? Let's dive in!

What Is the Cost of Living?

The cost of living is how much money you need to pay for things like housing, food, taxes, and medical care in a certain place and time. People often use the cost of living to compare how much it costs to live in one city to another. Wages affect the cost of living. If the cost of living is higher in a city like New York, for example, people must make more money to be able to live there.

Cost of Living and Income

When it comes to almost everything, the more money you make, the more you can buy -  a bigger home, car, food, utilities, and more.  The same goes for people who do not make much money.   The less money you have, the less you can spend on your home, your car, and your food.

So how much you can spend also depends on:

  • Where you live
  • How much money you make

Note: If you know how much a living wage is in your area, you can figure out if the cost of living is too high.

The Living Wage Explained

Check out the living wage for your city or town and compare it to your income to see if where you live is too pricey. The high cost of living in your area may make it impossible to sustain yourself financially if your income is inadequate.

Here are Some Great Tools to Compare Your Living Costs to the Averages in Your Area

Use a cost-of-living calculator to get a general idea of how much it costs to live where you are. Here are a few cost-of-living calculators you can trust:

While you are using these calculators, take some time to compare the cost of living in the city in which you currently reside to the cost of living in another city located within the same state or area.

Is Your Financial Future Being Held Back by the High Cost of Living?

If you can pay for everything you need right now, you might not think your cost of living is too high. But most cost-of-living calculators do not take into account your future finances. Many say what you need to earn to live, but they usually leave out contributions to an emergency fund, retirement, or other investment accounts.

According to a Bankrate study, 55 percent of Americans feel they are not saving enough for retirement, with roughly 35 percent saying they are "seriously behind" and another 20 percent saying they are "slightly behind" their objectives.

Rule of thumb: Don't bother making long-term financial projections without factoring in your retirement savings plan's contributions.

A retirement savings calculator is an excellent place to start if you're unsure of your needs. However, not all costs are the same, and everyone has a different definition of what a comfortable retirement looks like. This is why consulting with a financial planner can help, since they’ll work with you to establish a retirement goal or refine the one you have.   Although it's possible that you'll need to save more money than you anticipate or maybe delay retirement by a few years, at least you'll know exactly how much money you'll need for it down to the penny.

To learn how to develop a strategy that works for you,  get in touch with our affiliated Vincere Wealth team for a FREE 1-on-1 call! 

You can maximize your savings by choosing a retirement account with the help of the team at Vincere Wealth. A tax-sheltered 401(k) plan with employer matching, in which your employer matches your contributions up to a specified level, is a wise choice if your workplace provides it. In essence, it is free money. Or better yet, go after a Roth IRA if you can meet the contribution requirements. It is the BEST Tax saving option for retirement. Learn more here.

Other Costs to Factor Into Your Living Costs

You should also think about your savings for emergencies. In general, your emergency fund should be able to cover your costs for three to six months. But most people do not save money for that. 

When you think about your cost of living, you should also think about what you will need in the future. If you cannot save money for emergencies or put money away for retirement, it could mean that your cost of living is too high.

Think about the Cost of Living Before You Move

Get a feel for the local cost of living before making a big move. Consider the cost of living in your new city just as much as the potential salary increase if you're relocating there for work. If your living expenses also increase, you may not feel any better off financially even if your income increases.

Here are Some Good Reads If You Are Moving Soon:

Or if you prefer video content:

Housing is a big part of most people's costs of living. A good rule of thumb is that housing costs should take up about 30% of your income. If you spend more than 50% of your income on housing, you may be spending too much. Take a minute to figure out how much of your income goes toward your rent or mortgage payment. If the number is 50% or more, it means that your living costs may be too high.

How to Trim Your Living Costs

There are steps you can take if you've determined that you can't afford to stay in your current location. One of the best methods to cut your cost of living is to relocate to an area where your money goes further. Moving further away or even out of state could be an option if you currently reside in a costly major city. However, relocation isn't always something everyone can do.

Ways to Lower Your Cost of Living:

  • Make a budget and stick to it, write down how much money you are getting and how much you need to pay for things. Do you have enough room in your budget to pay off big debts like your student loan or car loan to get more money? You might be able to spend less on things like going out to eat or shopping online.
  • Review Your List of Expenses: Some bills, like insurance and phone bills, are not set in stone. Talk to your service provider or lender to see if you can get your bills lowered. For example, your car and health insurance premiums can go down if you raise your deductible.
  • Put a Halt on Your Credit Card: If you carry a balance from month to month, you pay interest rates in the double-digit range. If you pay off your balance in full every month by the due date, you would not have to pay interest. If you do not borrow money, you also have to pay for things with cash as much as possible and buy cars without financing. This forces you to stick to your budget.

Before making any drastic decisions, compare your income to the cost of living in the city of choice and make sure it is beneficial to you.

The Difference Between Inflation and Cost of Living

Even though they are similar, they are not the same.

Inflation is when the price of goods and services goes up, the value of a dollar goes down. The change in the Consumer Price Index (CPI) is often used to measure inflation. The CPI is a monthly measure from the Bureau of Labor Statistics (BLS) that shows the average price of a basket of goods and services from different parts of the country. It says how much the CPI went up or down as a percentage.

As previously mentioned, the cost of living is the average cost of a good standard of living, which includes food, housing, transportation, taxes, and health care. People often use the cost of living to compare the minimum income needed in different places. The Payscale calculator says that as of Oct. 17, 2022, the cost of living in New York City is 155% higher than the average cost of living in the rest of the country.  The cost of living is much harder to put a number on, since it varies a lot between different groups of people and between different places. 

With the help of a fiduciary financial advisor to help guide your decisions, you stand a much better chance of retiring comfortably—and maximizing your sources of income so you can live the life you want. Contact Vincere Wealth to start today!

I hope this was helpful!

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