If you’re reading this, it’s possible that your cost of living is causing you anxiety. Maybe you just want to see if you’re staying under a set spending limit. Or perhaps you’re simply interested in learning what it costs to live in your home or on your own.
Consequently, keep reading. I’ll explain how to calculate the cost of living in great detail in this essay, and I’ll also explain why it’s so important. And that might enable you to make necessary cost-cutting measures or save money for the future.
After that, I’ll add that the expense of living isn’t about being frugal or saving money. It’s more about how to budget your spending and make investments for the future.
How much does it cost to live?
You may have heard the phrase “the cost of living is rising” frequently. People who make that claim mean to imply that they are paying more than ever for daily necessities. Yes, you are correct; growing costs are related to the cost of living as well.
But contrary to what the majority of you may believe, your cost of living is not determined by how much money you spend annually, monthly, or even weekly. It also doesn’t matter how much extra you spent on that grocery basket or the cyclical price fluctuations.
Simply put, the cost of living is the value you receive for your money in relation to the federal minimum wage in the United States. This refers to the amount you actually spend on your household each year if you work 2,080 hours a year at the federal minimum wage of $7.25.
If you worked 2,080 hours a year at the minimum wage, you would make $15,080, according to this figure.
Then there are still more things to think about.
Factors to Take into Account When Calculating the American
Cost of Living Inflation
The biggest threat to your standard of living is inflation. This is due to the fact that earnings and wages typically don’t rise to offset the negative effects of inflation.
According to the US Bureau of Labor Statistics’ (BLS) strict inflation calculations, Americans would need to spend $25,827.98 in April 2022 in order to purchase all essential and necessary items.
In April 2021 and 2020, the identical items would have cost $23,857.67 and $22,094.89, respectively.
As you can see, these sums are far more than the $15,080 annual minimum pay that an individual making the federal minimum wage of $7.25 per hour may make.
Before I forget, only one individual is used to determine the income and cost of living. This refers to the costs incurred by a single person making the minimum wage over the course of a year.
This abundantly demonstrates how someone making minimum wage can’t truly pay living expenses and is quickly falling into poverty. If they don’t take on side jobs, do odd jobs, or hunt for freelance work, they won’t be able to keep up with the rising cost of living and avoid falling into poverty.
Your investments and savings are also impacted by inflation. Because of the rising cost of living, you would have less money for future investments and savings.
The American tax system
You would likely be in debt as a minimum-wage employee and already be having trouble paying your payments. That, however, does not enable you to avoid paying taxes.
Even minimum-wage workers are required by federal law to contribute 6.2% of their income to Social Security and 1.45% of their income to Medicare.
The disposable income that is available to minimum wage workers is further reduced by these taxes by around $96.75 per month. This amount may also increase significantly if you pay taxes late.
Costs of commuting
Even a worker making $7.25 an hour must get to work, either in their own car or by public transportation. In fact, daily commutes in the US are among the most expensive in the world.
For instance, Lendingtree.com, an online lender for mortgages, discovers that people in Fremont, California spend $15,065 on commutes annually on average. To get at these numbers, the firm looked at opportunity costs or travel costs across 100 major US cities.
Personal medical expenses
According to the US Agency for Healthcare Research and Quality, the majority of Americans are also responsible for paying a percentage of their own medical expenses. Of course, this depends on the condition being treated and the type of medical care required.
Seniors and people with chronic medical issues have the highest out-of-pocket medical costs. Additionally, these expenses reduce your take-home pay.
Decide what proportion of your income, even with Medicare or other comparable programmes, is spent on medical care for any disease.
How Can I Determine My Cost of Living?
As you can see from the aforementioned illustrations, nobody can avoid paying taxes, inflation, travel costs, and medical bills, not even those on minimum wage.
How would you determine the cost of living then?
When determining the cost of living, keep the following factors in mind:
- Food, childcare, and medical costs
As you are aware, these account for the majority of expenses. You must therefore calculate your exact spending on these headings.
The additional primary costs consist of:
- Utilities (electricity and water)
- Transportation (mobile and landline)
- entertainment (over-the-top (OTT) content, including cable TV and video rentals).
- Costs that were not anticipated (plumbing, gardening, electrical, and other services).
- Milk, creamer, tea, or coffee
There are also numerous charges in the third group. And some of these are actually necessities for us.
There are several expenses in the third category:
- Magazine and Amazon Prime Subscriptions
- Holiday or vacation travel
- Alcohol, smoking, and recreational drugs
These are some of the factors that the Massachusetts Institute of Technology’s (MIT) living wage calculator would take into account when determining the cost of living per person.
In reality, this calculator is widely used by decision-makers in the federal, state, and corporate sectors to determine the cost of living in order to determine employee salaries and other criteria.
Effect of Cost of Living on Savings
It is simple to evaluate the effect on your savings and investments after you have determined your cost of living. According to Statista, the average household savings rate in America dropped to 7.3% in May 2021 from 8.2% in May 2020. At the time this article was being written, May 2020 statistics weren’t yet available.
In actuality, the Department of Commerce’s US Bureau of Economic Analysis has even more worrisome projections for 2022.
According to their website, the average American household had savings of just 4.4% in April 2022. In January 2022, it was at 6% before it started to decline. The savings rate was 5.9% in February 2022 and will decrease to 5% in March 2022.
According to a new survey by the American investing behemoth Northwestern Mutual, Americans currently have an average total savings balance of $62,000, down from almost $73,000 in 2021.
However, according to a news study, the average American household only has savings totaling close to $11,000. Most Americans—about 64%—live paycheck to paycheck or are highly reliant on their salaries and wages, with no room for savings.
Why is the cost of living important?
Now that you are aware of how to calculate your cost of living, the elements that affect it, and the consequences those factors have on your savings, it is important to comprehend why you should do so.
First off, you can see that, in most circumstances, your salary wasn’t actually enough to close the difference in expenses brought on by inflation when you assess your cost of living. That implies that you had to dip into your funds or reduce them.
This directly affects your future and has a domino effect. In fact, according to research by GOBankingrates.com that was featured by Yahoo News, 64% of all Americans lack the necessary financial resources to retire.
Because of the rising cost of living and the declining worth of money brought on by rising inflation, the majority of them are delaying their retirement investments and savings.
It is undoubtedly impossible to save and invest for retirement if you know how to calculate the cost of living. Additionally, inflation won’t stop or disappear.
If you want to have a secure future and live during those “golden years,” this directly translates to you needing to save more money and make more investments.
Debt and Living Expenses
And now a word of warning. Debt service obligations can suddenly increase your cost of living if you don’t pay them on time. On credit cards, delayed, late, or deferred payments are subject to fines and high Annual Purchase Rate (APR) fees.
As a result, when figuring out your cost of living, also account for the money you would need to pay for credit card expenses. You’ll frequently discover that it isn’t keeping up with your inflation- and income-related expenses.
Understanding how to calculate the cost of living helps prevent a number of financial issues. I therefore advise you to do your cost of living calculation right away. Your time and effort are worthwhile.