If you’re reading this article, maybe you’re worried about your cost of living. Maybe you simply want to find out whether you’re living within a fixed budget. Or, maybe you’re just curious to know the cost of living for your household or you as an individual.
Therefore, continue reading. In this article, I will give you all details on how to calculate the cost of living while helping to understand why the cost of living really matters. And that might help you to save money for the future or cut back expenses where possible.
Having said that, I’ll add that cost of living isn’t about saving money or thrift. Instead, it’s more about how to plan your expenses and invest for the future.
What is the Cost of Living?
Often, you might have heard the refrain: “the cost of living is rising.” Persons who say that actually wish to say that they’re spending more now than ever before, on their daily expenses. Yes, that’s right, the cost of living does have to do with rising prices too.
But as most of you might wrongly believe, your cost of living doesn’t depend on how much you spend every year or every month or even during a week. Nor does it depend on how much more you paid for that basket of groceries and the seasonal price rises and dips.
In simple words, the cost of living is the value for the money you get, in comparison to the minimum wage in the USA. This means, how much you actually spend on your household every year if you are earning the national minimum wage of $7.25 per hour by working a total of 2,080 hours per year.
At this calculation, you would be earning $15,080 per year with the minimum wage and 2,080 hours of work per year.
Then, we have other factors to consider.
Factors to Consider While Calculating Cost of Living
Inflation in the USA
Inflation is the single largest threat to your cost of living. That’s because salaries and wages don’t usually increase to help us overcome the negative effects of inflation.
Strictly going by the inflation calculator by the US Bureau of Labor Statistics (BLS), to buy all the things that are basic and necessary, Americans would have to spend $25,827.98 in April 2022.
The same things would have cost $23,857.67 in April 2021 and $22,094.89 in the year 2020.
As you can clearly see, these amounts are much higher than the minimum wage of $15,080 per year that a person on the minimum wage of $7.25 per hour can earn.
Before I forget, the income and cost of living are calculated on basis of one person only. This means, the expenses of one person earning minimum wage and their expenses in one year.
This amply proves that a person living on minimum wage only can’t really afford the cost of living and is rapidly slipping into poverty. Unless they find part-time jobs, perform side-gigs or look for freelancing opportunities to earn extra money to meet the rising cost of living and stay above the poverty line.
Inflation affects your savings and investments too. The rising cost of living means that you would have lesser money for savings and investments for your future.
Taxation in the USA
As a minimum wage earner, you would already be struggling to pay bills and possibly in debt too. However, that doesn’t help you to evade taxes.
Under Federal laws, even minimum wage earners have to pay 6.2 per cent of their wages on Social Security contributions and 1.45 per cent of their wages to Medicare.
These taxes further slash the disposable income available to minimum wage workers by about $96.75 per month. And if you’re paying taxes late, this figure can go up much higher too.
Commute Costs
Even a worker getting a minimum wage of $7.25 has to commute to work, either by own vehicle or using the public transport system. In fact, the US has some of the most expensive daily commutes in the world.
For example, Lendingtree.com, the online home loans provider finds that persons in Fremont, California spend an average of $15,065 per year on commutes. The organization analyzed opportunity costs or commute costs across 100 big cities in the USA to arrive at these figures.
Out of Pocket Medical Expenses
According to the US Agency for Healthcare Research and Quality, most Americans also have to meet some portion of their medical treatment costs themselves. Obviously, this depends on the nature of the illness or the type of medical treatment that is necessary.
Out-of-pocket medical expenses are highest for seniors and persons with chronic medical conditions. And these costs also eat into your minimum wages.
Therefore, calculate the percentage of your income that goes into medical treatment for any condition, despite having Medicare or other similar plans.
How to Calculate Your Cost of Living?
As you can see in the above examples, it’s impossible for a person, including those living with minimum wages, to escape taxation, inflation, commutes and medical expenses.
Therefore, how would you calculate cost of living?
Here’re some important things to consider when you calculate cost of living:
- Food
- Childcare
- Medical Expenses
- Housing
As you would know, these form the bulk of expenses. Therefore, you have to find out exactly how much you spend on these heads.
The other major expenses include:
- Transportation
- Education
- Utilities (electricity and water)
- Telecom (mobile and landline)
- Entertainment (cable TV and video rentals or Over the Top (OTT)).
- Incidental expenses (plumbing, gardening, electrical and other works).
- Tea, coffee, milk or creamer
- Internet
The third category of expenses includes a lot too. And some of them are indeed our basic needs.
The Third Category of Expenses includes:
- Clothing
- Fitness
- Subscriptions (magazines, Amazon Prime)
- Vacation or holiday travel
- Alcohol, tobacco, recreational drugs
- Gifts
These are some of the items that the Living Wage Calculator of the Massachusetts Institute of Technology (MIT) would consider while calculating the cost of living per person.
In fact, this calculator is extensively used by policymakers in the Federal and state governments as well as the corporate world for finding the cost of living to calculate employee compensation and other factors.
Impact of Cost of Living on Savings
Once you calculate your cost of living, it’s also easy to calculate the impact on your savings and investments. According to Statista, the average savings of an American household stood at only 7.3 per cent in May 2021 as compared to 8.2 per cent in May 2020. The figures for May 2020 were not available at the time of writing this article.
As a matter of fact, the US Bureau of Economic Analysis which functions under the Department of Commerce has even more alarming statistics for 2022.
Their website says an average American household had a savings percentage of only 4.4 per cent in April 2022. It was six per cent in January 2022 and started dropping. In February 2022, the savings percentage was 5.9 per cent going down to five per cent in March 2022.
Another study by the investment giant of the USA, Northwestern Mutual proves that Americans now have an average of $62,000 as their total savings, compared to over $73,000 in 2024.
However, a report by the news channel states that in reality, the average American household has savings of nearly $11,000 only. About 64 per cent of all Americans are living from paycheck to paycheck, or, dependent heavily on their salaries and wages, with no scope of savings.
Why does the Cost of Living Matter?
Now that you have all the information about How to calculate cost of living?, the factors that impact your cost of living and the effects they have on your savings, it’s also worth understanding why you should calculate your cost of living.
Firstly, when you calculate your cost of living, you can see that in most cases, your income wasn’t really sufficient to bridge the gap in expenses caused by inflation. That means, you either had to dig from your savings or curtail savings.
This has a cascade effect and directly affects your future. As a matter of fact, a study by GOBankingrates.com that was published by Yahoo News shows that 64 per cent of all Americans aren’t financially prepared for their retirement.
That’s because most of them are delaying their investments and savings for retirement, due to the cost of living and the depreciating value of money due to rising inflation.
If you understand How to calculate the cost of living, surely, you would find that it is not possible to save and invest for retirement. And inflation isn’t going to cease or vanish.
This directly translates as more savings and investments for you, if you want a secure future and life during those golden years.
Debt and Your Cost of Living
And finally, a word of caution. If you don’t service your debt regularly, they can send your costs of living spiralling upwards without a warning. Delayed, late or deferred payments on credit cards attract penalties and also stiff Annual Purchase Rate or APR charges.
Therefore, when you calculate your cost of living, take into consideration the amount of money you would be paying for your credit card expenses too. Often, you will find it out of sync with your inflation and income-related expenses.
In Conclusion
Knowing how to calculate cost of living can help avoid several money problems. Therefore, I suggest you calculate your cost of living now. It’s worth your time and effort.
Samuel Mitchell is a financial analyst with expertise in investment research and risk assessment. With a background in finance and advanced certifications, he delivers accurate and concise financial analysis. Samuel's writing style is precise and data-driven, providing actionable insights for readers. Explore the world of finance with him and make informed investment decisions.
