How to lower your cost of living

As inflation continues to increase and affect the cost of everyday items, many families are feeling the squeeze. Households around the globe are taking a closer look at their budgets and finding ways to cut back spending to try and keep pace with rising expenses. Many families are also considering moving to a different city where the cost of living is more affordable. If you’re exploring your own cost of living and ways to decrease your monthly expenses, here are several important factors to keep in mind.

What is cost of living?

Cost of living is the amount of money required to live in a certain area and cover all of your necessary expenses, like housing, food, health care, gas, taxes, entertainment, and education. This amount can vary greatly from city to city and maintaining your lifestyle on the same income can prove challenging if you move to a new location where the cost of living is higher. This total amount is also affected by how rural or urban your area is, because it’s directly correlated to your housing, food, and energy costs. For example, living closer to farms or other food production may keep your food costs lower. Oftentimes, cost of living is tied to salary, meaning the higher the expenses are in an area, the higher the salary levels are in that region to maintain the standard of living.

How to calculate your cost of living

Understanding your cost of living not only can help you live more comfortably but allows you to create an accurate budget and make decisions that better support your financial health. Each person’s cost of living is different. Calculate yours to get a realistic snapshot of your expenses by adding up all of your monthly expenses, including both necessities and non-essentials. If you want to get a general idea of your annual costs, multiply this monthly total number by twelve. There are several ways to reduce your cost of living and help get back in balance.

What could be causing the increase in cost of living?

As the cost of living increases around the world, rising prices are affecting nearly every household. Some of the likely factors affecting this spike are climbing energy prices, supply chain disruptions, and high demands on limited supplies. While the effects of inflation are unavoidable, you can make adjustments to your budget and spending to help ease the financial strain.

How much should my cost of living be?

Individual factors like your family size, whether you own or rent a home, or commute to and from work all affect your cost of living. A general rule to help keep your costs in check is the 50-30-20 rule, which designates 50% of your income to your “needs” or necessities each month, 30% to your “wants”, and 20% to your savings or paying off debt. If your wants and needs are taking up too much of the total income pie, then determine ways you can cut back spending.

If considering moving to a new location, a good idea is to compare the cost of living of each place and determine what adjustments to your budget might be necessary. You can use a cost-of-living comparison calculator to estimate the difference in expenses between your current place of residence and the city you’re considering. As you look at the breakdown of expenses and the percent difference between the two locations, housing costs may likely be one of the most important factors to keep in mind.

How much of my income should go to housing?

Several factors influence how much you can afford to spend on housing, including your income, debt amount, credit profile, and the amount you have in savings. A general rule is you should never exceed 30% of your gross monthly income to cover housing costs. If you rent, this amount includes utility costs, and if you own your home, this should include your mortgage, homeowners insurance, utilities, and property taxes. For example, if you make $70,000 a year before taxes, generally you should spend no more than $1,750 a month on your housing.

How can housing costs affect my overall quality of life?

As you take a closer look at your overall cost of living, you may want to determine if your current housing expenses match your current lifestyle and goals. If you would like to travel more or have extra income to put towards concerts or sporting events, you may want to determine ways to reduce how much you spend each month on housing. Since it is often your largest expense, this is where you can make the biggest impact to fine-tune your budget. If you’d rather invest in your home, you may want to look for other ways to reduce your spending and minimize how much is spent in the other areas of your budget.

How do I lower my cost of living expenses?

As you review your budget, highlight places where you can reduce costs, even if temporary. Perhaps your employer offers remote work options where you can save money on vehicle upkeep or transportation and fuel costs. Or you can reduce how much you’re spending on food delivery or eating lunch out by meal planning for the week. By incorporating some budget-friendly habits, especially during financially challenging times, you may still build up your emergency fund, save for retirement, and keep your financial goals on track. Every sacrifice you make, even small ones, can have a significant impact and help set you up for a stronger financial future.

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