Cost of Living: How Inflation Affects Your Wallet

Inflation and cost of living are hot topics in the news, but their impact on your wallet is often misunderstood. 

The goal of this article is to give you a solid understanding of what cost of living means, how it relates to inflation, and offer tips to manage rising expenses. 

What is the cost of living? 

The cost of living is the total amount of money needed to cover your living expenses, including: 

  • Taxes 
  • Rent or mortgage 
  • Insurance (health, car, home, etc.) 
  • Phone, internet, and TV 
  • Subscriptions 
  • Groceries 
  • Dining out 
  • Gas 
  • Car payments 
  • Utilities 
  • Other regular expenses 

The Cost of Living Index (COLI) compares these expenses in different areas. Knowing your local cost of living can help you budget more effectively. 

What affects your cost of living? 

Your cost of living depends on several factors: 

Household size 

The number of people you need to provide for has a big impact on your cost of living. A single person has lower costs than someone supporting a family. 

Your lifestyle 

Your spending habits influence your costs. Frequent dining out or cooking elaborate meals increase food expenses compared to a simpler diet. Similarly, regular vacations and outings cost more than staycations and movie nights. 

Where you live 

Cost of living differs by city and state. New York City, for example, has the highest cost of living of any city in the United States, while Hawaii has the highest cost of living of any state. 

Cost of living vs. inflation: What’s the difference? 

Cost of living refers to the money needed for everyday expenses, while inflation measures the yearly rise in prices of goods and services. Though distinct, they are closely linked. 

When inflation rises, the cost of living also increases as prices for daily necessities go up. Conversely, when inflation falls, the cost of living tends to decrease. 

How is inflation measured? 

There are different ways to measure inflation: 

  • Consumer Price Index. The Bureau of Labor Statistics calculates the average cost of goods and services, including items like groceries and gas. 
  • Personal Consumption Expenditures (PCE) Price Index. The Bureau of Economic Analysis measures overall spending on goods and services in the United States. 
  • Federal Reserve. Using the CPI, PCE, and other economic data, the Federal Reserve sets interest rates, influencing inflation’s rise and fall. 

Why is rising inflation bad for the wallet? 

Rising inflation means the cost of everyday goods and services increases. For instance, if a coffee maker that cost $100 last year now costs $110, that’s a 10% inflation rate on that item. 

Applying this to all your purchases — gas, groceries, utilities, tickets, and appliances — means you spend much more than before. If your wages don't rise at the same rate, you'll earn the same amount but pay significantly more, forcing you to dip into savings. 

>RELATED: Inflation and Debt

Why is the cost of living on the rise? 

The cost of living is on the rise for two main reasons: 

  1. Inflation. According to the US Inflation Calculator, the inflation rate is currently at 3.5%, up from 3.1% at the start of the year, and over 3% from 2020. 
  2. Stagnant wages. In a healthy economy, wages and inflation rise together, balancing each other out. Currently, inflation is outpacing wage growth, driving up the cost of living. 

Why is inflation expected to continue rising? 

Several factors have influenced the rise of inflation: 

  • Surplus of money: The U.S. government printed excess money during the COVID-19 pandemic, decreasing the dollar's value and reducing purchasing power. 
  • Political and international unrest: Events like the Russia-Ukraine war and domestic elections cause uncertainty, contributing to inflation. 
  • Supply and demand. Global supply chains have been disrupted due to natural disasters, the US-China trade war, and other operational difficulties. Supply can't keep up with demand, resulting in higher prices. 

These factors, combined with stagnant wages, mean inflation continues to negatively impact your wallet. 

How to beat the high cost of living: Tips and tricks 

Rising inflation is inevitable, but you can ease its impact with these strategies: 

Create a budget 

Track your spending and plan your expenses to better manage your finances. By accounting for every penny and avoiding impulse spending, you’ll have a much better handle on your finances. 

Cut back on non-essentials 

Reduce spending on non-essential expenses like dining out and vacations. Allocate funds for these only if your budget allows. 

Consider downsizing 

If you’re like most of us, housing is your single biggest expense. To cut back on your rent or mortgage, consider moving to a smaller home or more affordable area. 

Choose energy-efficient options 

Although they require an initial investment, energy-efficient appliances and solar panels will save money in the long run. Potential upgrades include your heating and cooling system, water heater, washing machine, dryer, and low-flow toilets. 

>RELATED: Living Green on a Budget

Use alternative transportation 

Gasoline prices are usually one of the first things to skyrocket when inflation hits, so the less you use, the more you’ll save. You might be able to reduce your car use by biking, walking, or using public transport to save on gas. 

Pick up a side gig 

Increase your income by taking on a side job, negotiating a raise, or working extra hours. Combine this with cost-saving measures to maximize your savings. 

Get ahead of inflation with Advance America 

The current cost of living and rising inflation can strain your finances, but with the right strategies, you can manage and even overcome these challenges. And if you still need extra help to get back on financial track, we’re always here to help!

About the Author

Jalin Coblentz has contributed to Advance America since 2023. His experiences as a parent, full-time traveler, and skilled tradesman give him fresh insight into every personal finance topic he explores.

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