Decoding the Cost of Living: What are Living Expenses?

What are living expenses?

Putting a budget together can be a daunting exercise. Not only are there a number of different methods for organizing your expenses and income but keeping track of everything can be frustrating and difficult.

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Simply put, your living expenses, also known as the cost of living, are items that you cannot cut from your budget. These are expenses that are necessary to cover basic expenses so you can afford live in a given place. Cost of living includes items like:

• Housing. The largest bill that consumers pay every month is for housing, whether it’s for rent or a mortgage. Property taxes, home prices, and rent vary from one location to the next. Other costs pertaining to housing include upgrades, maintenance, and HOA fees.
• Groceries. If you’re just grocery shopping for yourself or if you’re feeding a large family, each trip to the grocery store will impact you and your family differently, depending on how much food costs where you live. A gallon of milk may cost more in one town than in another, which may influence your decision about where to live, based on how much money you’d spend on food.
• Transportation. This may affect you less if you work from home, but transportation affects where many people choose to live. A car payment, gas, maintenance, and insurance are all expenses to consider if you live somewhere without public transportation. You’ll also need to consider how much you’ll spend on parking, taking a taxi, and how much a monthly pass for public transportation costs.
• Entertainment. Consider the cost of a movie ticket or a burger at a restaurant. Not only do these expenses add up, but they can vary from city to city. For people who enjoy nightlife, this might be a greater financial factor.
• Healthcare. Large cities may have multiple major hospitals, and many corresponding clinics, and this may be an attractive option to people with health issues. Smaller cities may not have the same resources; there may be additional costs involved with traveling to see a specialist or have a procedure done. Healthcare costs also cover over the counter items and insurance premiums, which will vary by state and provider.
• Clothing. If you live somewhere that has extreme seasonal changes, you may need a wardrobe that allows you to dress comfortably in many different temperatures. If you have a large family, these costs may add up.

The average amount of money that an individual spends on these sorts of non-negotiables can vary drastically from place to place and is often used to show how expensive it is to live in one city as opposed to another. This comparison is what’s known as a cost-of-living index, and it is frequently used to help people understand how expensive one place is compared to another, and how far their money might go.

Cost of living can be a big factor when determining someone’s personal wealth. A person with a job that pays a salary in the low six figures might still feel their purse strings tightening in a large, expensive city like New York or San Francisco. However, if that individual relocates to a smaller town with a lower cost of living, that six-figure salary might allow them to live a life of relative luxury.

Looking at a cost-of-living index can help people choose where to settle down and start a family, where to attend college, and where to look for careers. Remote workers might use this tool to see where their income will get them a better life, with lower overhead.

Cost of living and your budget

Depending on where you live, putting a budget together can feel like a daunting task. This is especially true if you live in an expensive city or have a lower-paying job. There are few ways to help make every dollar count.

First, you’ll need to determine what your monthly living expenses are. A zero-based budget is a great tool for this. You compare your monthly income against your monthly expenses and track your purchases to determine where you can save money.

Some other money saving tips include:

• Splitting costs with a roommate if living alone is too expensive
• Eat out less frequently
• Buy in bulk and reduce unnecessary purchases
• Use a bike as your main form of transportation, if possible

Another helpful way to cut back on discretionary spending is to try a method called the envelope budgeting system. Rather than tracking your expenses with a list or receipts, the envelope system relies on physical cash in envelopes. It’s a tangible reminder of how much money you have to spend and can help curtail frivolous expenses.

A city’s cost of living can seem like a vague thing, but understanding some of the underlying costs of living in a place can help you establish a monthly budget that allows you to live comfortably while saving for the future.