Why (and How) to Calculate Your Cost of Living

Why (and How) to Calculate Your Cost of Living

1000 667 Stefanie OConnell

When we think about what would make our financial lives easier, most of us come to the same conclusion: that a little more money would make all our problems go away.

Chances are, though, if you’re struggling with money troubles, earning more of it isn’t going to magically solve your problems. That anxious feeling that comes when there’s more month left than money doesn’t automatically disappear just because you have more coming in. However, a smart spending plan can help you break the paycheck-to-paycheck cycle and get ahead.

Calculating Cost of Living

Getting your money in order starts with figuring out your cost of living. This figure serves as the benchmark against which you can calculate your other financial metrics, like how much you need to earn, how much you can afford to save and how much you can invest.

Start calculating cost of living by listing out all of your expenses for each month. Include:

  • Routine expenses. Some bills — rent, insurance premiums, utility bills — come each month like clockwork, making them easy to add to your list.
  • Variable expenses: These change from month to month, but you can be sure that some amount of money is regularly leaving your pocket to cover expenses like gas, utilities, groceries and personal care items.
  • Irregular expenses. These are the costs you forget you ever have to pay … that is, until you get the bill. Think car maintenance, home repairs, tax preparation fees, and so on.
  • Event-based expenses. There are some holidays, birthdays and weddings you can’t get out of, even if your wallet is begging you to. The exact amount of these expenses can be difficult to predict, but try for a rough estimate averaged out on a monthly basis.

Add these numbers up, and you’ll have your cost of living. Subtract your total from your take-home pay to see how much wiggle room you have in your budget for saving and investing — or, let’s be honest, spending on takeout.

This exercise does involve some math (and maybe a few embarrassed glances at your transaction history), but it can help you determine whether you actually need more money or whether a little bit of money management is the key to having more cash on hand. It also gives you a guide to what cuts you can make and how much of an impact they’ll have on your budget. What would happen if you bought the slightly bruised produce from a farmer’s market instead of picture-perfect items from the grocery store? Skipped your second cousin’s destination wedding? Moved in with roommates?

Preparing for the Unexpected

As we saw above, irregular expenses can make calculating your total cost of living tricky. They also include expenses you might have listed as routine. You probably know how much your monthly health insurance premium is, for instance, but can you really say with confidence how much you’ll spend on your health once you factor in out-of-pocket costs?

Capturing all of these expenses is easier when you take a bird’s-eye view of your budget. Map out the year ahead, not just the month. If you know what appointments or treatments are already booked, you can divide those by 12 to determine a monthly cost. For truly unpredictable expenses, look at what you spent last year, or the average of several recent years. Again, divide by 12 and add that number to your monthly budget. If you overshoot the mark, all the better — that’s money you’ve saved.

Occasionally, you’ll run into an expense that you never could have predicted. It’s not your budget’s job to take a sudden income loss into account. That doesn’t mean you can’t protect yourself, though. In cases like these, a strong emergency savings fund will come in handy. Ideally, you should have enough set aside in a dedicated savings account to keep the lights on and the bills paid for six months. It normally takes a while to save up this much, so make it easier by including it in your budget. Divide your emergency fund goal by the number of months you think you can reasonably save it in.

It’s also worth looking into tools that can help support you through a major financial event. Keep a list of local programs and other resources that offer assistance, and consider whether small additional expenses — like paying the generally low premiums for supplemental insurance — might be worth it if they can get you out of a sticky financial situation later on.

Don’t forget to revisit and reassess your expenses regularly. Moving to a new city or starting a family will have major implications for your cost of living, in addition to your insurance needs and just about every other aspect of your financial life. Don’t let your list of cost of living expenses be a record of how much you aim to spend — make it a living document that reflects your individual financial plans, strategies and goals.

Stefanie OConnell

Author of the book, "The Broke and Beautiful Life," Stefanie O'Connell has been dubbed 'a financial expert, helping millennials feel as confident with their money as they do in their lives.

All stories by:Stefanie OConnell

Stefanie OConnell

Author of the book, "The Broke and Beautiful Life," Stefanie O'Connell has been dubbed 'a financial expert, helping millennials feel as confident with their money as they do in their lives.

All stories by:Stefanie OConnell