Not all financial emergencies need to be sudden ones. It's the slow, predictable compression of costs creeping up here and there until one day, you wake up and find that staying afloat requires nearly all of your energy.
If you're always broke, racking up credit card balances or even considering debt settlement (trying to negotiate down debt) as a recourse, it could well be an early warning that your lifestyle is simply out of control in terms of cost. And believe me, you're not alone here.
What, Really, Is "Cost of Living"?
When most people think of cost of living, they tend to consider only the cost of rent or mortgage. But in reality, it comprises everything you buy to sustain life: groceries, transportation, utilities, health care, insurance, child care and more. As these costs inch into the realm of unaffordability, your anxiety about finances will go through the roof.
American households, on average, spend roughly $63,000 a year on living expenses, according to the Bureau of Labor Statistics. That's a lot. But here's what's truly eye-opening, housing alone makes up about 33% of that spending, meaning it's the No. 1 expense for most families.
The 30% Rule in Housing: Time to Retire?
Housing is generally the most expensive monthly cost, so it is a good place to begin when assessing your cost of living. The standard rule of thumb holds that your rent or mortgage should be no more than 30% of your gross monthly income. Gross income is your income before taxes or other deductions are removed.
But let's be real here. This rule was established decades ago, a time when the cost of housing was much lower compared with what people were making. For many pricey cities where rents have surged, this rule of thumb feels next to impossible to follow.
"The 30% rule is more of a rule of thumb than a rule of law, especially in today's housing market, in which costs have far outpaced wage growth" - Suze Orman, Financial Expert
If you're shelling out much more than 30% on housing, it's by necessity leaving too little room in your budget for other essentials. Expensive housing is a major reason many people have to fight with themselves to save money and even wind up taking on credit card debt to cover ordinary expenses.
The 50/30/20 Rule and Other Helpful Budget Tips
Beyond housing, you can apply this rule to measure whether your entire cost of living is in balance. This rule of thumb advises you to break your after-tax income into the following categories:
- 50% for basic necessities such as housing, utilities, transportation, insurance, groceries and minimum debt payments
- 30% for value spending like dining out, entertainment, shopping and hobbies
- 20% for what you're saving and paying down debt, in order to build your financial future
If you realize that your needs are taking more than 50% of your income, chances are good that your cost of living is too high. This can make it nearly impossible to save or pay off debt in a meaningful way, all of which can force you into a paycheck-to-paycheck cycle.
According to the National Endowment for Financial Education, 78% of Americans are living paycheck to paycheck, no matter their income. That's an astonishing statistic that demonstrates how universal this problem is.
Red Flags: When Your Cost of Living Gets Out of Control
Sometimes you have to take a step back and consider the bigger picture. Here are some red flags that your cost of living could be too high:
1. Credit Card Dependency for Basics
Your credit cards are relied upon for ordinary living expenses. This is a major red flag. Credit cards should be a convenience or used in emergencies, not at the grocery store.
2. Zero Emergency Savings
You can't save even a small emergency fund. Financial advisors suggest that you should have in reserve at least $1,000 for unexpected expenses.
3. Frequent Account Overdrafts
You frequently overdraw your bank account or borrow from family or friends. It means your costs are consistently exceeding your income.
4. Growing Debt Despite Payments
Your debt balances never seem to get smaller no matter how much you pay each month. Chances are, you're making minimum payments while continuing to add new charges.
5. Constant Financial Anxiety
You live under constant financial stress and worry about bills. You shouldn't be thinking about money every minute, all day.
6. No Buffer for Unexpected Costs
You have no cushion for surprises. Your entire budget could go off the rails with a car repair or a medical bill.
If some of these are sounding familiar, it's probably time to get real with your spending and see where there's wiggle room.
Smart Strategies for Cutting Back (Without Feeling Deprived)
Cutting costs is not always about having to give up everything you love in order to save! Don't underestimate the power of making smarter decisions and targeting areas of overspending you may not even realize you're dealing with:
Housing changes: Are you able to relocate to a smaller or less expensive unit? If so, think about moving to a more affordable area, or downsizing your current space.
Subscription audit: Got subscription services you use rarely? The average American consumer pays for 2.6 streaming services but typically doesn't use all of them regularly.
Food spending: Is it possible for you to cook more meals at home, rather than dining out? You can generally expect a restaurant meal to be 3 to 4 times as expensive as it would be to make it at home.
Insurance review: Do you need to shop around for better insurance rates? A simple switch in some cases can save people hundreds of dollars annually.
Transportation optimization: Can you take public transportation or carpool more frequently? The average household spends about $9,000 a year on transportation costs.
Small changes can accumulate over time and take the pressure off your budget. Even a $50 monthly reduction in various categories would put an extra $600 back in your pocket annually.
The Income Side of the Equation
Of course, you can only slash so much from your budget. If you still have high living expenses even after that trimming, perhaps your next order of business is to focus on increasing your income. This could mean:
Asking for a raise at work. The statistics tell us only 37% of employees have ever asked for a raise, but 70% of those who do ask actually recieve one.
Pursuing a higher-paying job. On average, job switching can result in a salary increase of 10-20%.
Exploring a side hustle or freelancing. The gig economy has opened the door to lots of additional income opportunities.
Learning a skill or gaining a certification to enhance your earning power. Through online learning platforms, it's easier than ever to build the skills you need.
Earning more provides you with more freedom and makes higher cost of living more manageable without slipping into debt.
Avoid the Lifestyle Inflation Trap
One of the most common culprits when it comes to cost of living spiraling out of control is lifestyle inflation. When people make more money, they frequently spend more money, on bigger homes, nicer cars, fancier vacations and more elaborate shopping. It never feels like it in the moment, but it really can keep you living paycheck to paycheck even at a higher income.
"It makes total sense to assume you can spend more once you have more, but that's the biggest mistake people make financially. Yet people allow their spending to naturally grow as their income grows and one day they wake up and are like, 'Wait a minute, I don't have anything left.'" - Ramit Sethi, Personal Finance Author
Being mindful of lifestyle inflation and electing to continue living below your means as your income increases help to ensure that you save and accumulate wealth instead of spending every dollar you make.
When to Seek Professional Help
If your cost of living is so high that you're drowning in debt, you may want to get assistance from a nonprofit credit counselor or financial adviser. The National Foundation for Credit Counseling provides free or low-cost counseling services nationally.
In some cases, options like debt settlement may provide short-term relief, but they come with consequences like damaged credit scores, tax ramifications on the forgiven debt and potential fees. It is crucial to consider the pros and cons before taking that route.
The sooner you act on a cost of living that's simply become unreasonable, the easier it will be to get back on track financially.
Know Your Numbers: First Step to Financial Freedom
You can't fix what you don't measure. Taking the time to assess your income, expenses, and debt is the first step in determining whether or not your cost of living is too high. Use simple rules like the 30% housing guideline and the 50/30/20 budget rule as benchmarks to judge how you're doing.
If you notice your expenses are outpacing your income, you don't have to panic. You have options. Whether by cutting back, earning more or doing a little of both, getting in control of your cost of living will help reduce your stress, improve your financial health and give you more freedom to enjoy life instead of constantly worrying about money.
Keep in mind that financial well-being isn't about perfection, it's about making decisions that are as informed as possible and align with your values and long-term goals. Start small, stay consistent and celebrate the progress you make along the way.
References:
- Bureau of Labor Statistics. (2024). Consumer Expenditure Survey Annual Report. Retrieved from https://www.bls.gov/cex/
- National Endowment for Financial Education. (2023). Financial Wellness Statistics Report. Retrieved from https://www.nefe.org/research
- Federal Reserve Bank of St. Louis. (2024). Housing Cost Burden Analysis. Retrieved from https://fred.stlouisfed.org/
- National Foundation for Credit Counseling. (2024). Annual Financial Literacy Survey. Retrieved from https://www.nfcc.org/
- PayScale. (2024). Salary Negotiation and Job Change Impact Study. Retrieved from https://www.payscale.com/research/
- Deloitte. (2023). Subscription Economy Growth Report. Retrieved from https://www2.deloitte.com/insights/
- U.S. Department of Agriculture. (2024). Food Expenditure Analysis. Retrieved from https://www.usda.gov/data/
- American Transportation Research Institute. (2024). Household Transportation Cost Analysis. Retrieved from https://truckingresearch.org/