How to determine your cost of living, and tips on how to reduce it

It has been reported that 80% of Americans live beyond their means. They live paycheck to paycheck, rotate which monthly bill to skip, and have no means of retirement other than the unreliable social security. Also, the average american has $60,000 in debt between mortgage, car loans, student loans, and credit card debt.

This article meant to be a guide, not an exact model, to help you realize your standard cost of living, and find ways to improve it.

Determine your cost of living

Take all your bills and add them up as an annual cost, then divide by 12(months). Things to remember when adding up your cost of living:

  • Rent
  • Mortgage
  • Electricity
  • Water
  • Natural Gas
  • Petrolum Gas
  • Cellular Phone
  • Landline Phone
  • Lawncare
  • Vehicle
  • Homeowners
  • Homeowners Deductable
  • Renters
  • Renters Deductable
  • Health
  • Health Deductable
  • Vehicle
  • Vehicle Deductable
  • Pet
  • Pet Deductable
  • Umbrella
  • Umbrella Deductable
  • Professional
  • Professional Deductable
  • Gym
  • Lodge
  • Subscriptions
Take your total annual cost of living, minus the recreation, and subtract that from your total annual income. That amount should not exceed 60% on your annual income. If that amount is more than half your total annual income, then you are living paycheck to paycheck, and are not setting aside enough for retirement, unemployment, or an emergency. That result really puts things into perspective doesn't it?

The remaining 40% should be used for:
  • 10% invested
  • 10% savings
  • 10% retirement
  • 10% recreation

The Secret

The secret to affordable living is to lower your monthly bills, paying as many of your bills annually as you can, and spend more now to save later.

Lower your monthly bills

This is a no-brainer. Do you really need unlimited 5G data when there is plenty of free Wi-Fi around? Do you really need 200MB internet download speeds, when you could get half that for half the cost, but still is twice what you need? Do you really need to subscribe to multiple movie streaming networks?
It's time to rethink your priorities...

Pay annually

Paying your bills annually gives you a peace of mind knowing you're gonna be ok if your income stops rolling in temporarily or unexpected expenses pop up. It's alot less stressful because you don't have to worry as much if you get sick and miss a few days of work; or if your car breaks down and it needs an emergency repair.

Spend more now to save later

Paying more upfront is better than paying a little over time when it comes to the cost of living. For example, let's say you're doing well income-wise. Your thinking of upgrading your light bulbs from incandescent to LED. You estimate that by doing so, it will save you approximately $10 a month in electric costs. However, each bulb costs $2.50 each and it will take 3 years before it justifies the expense of upgrading all of your light bulbs. What do you do? Well, I say upgrade them all at once, because you never know over the next 3 years if you will continue to do well income-wise. What if the company shuts down and you're laid off or out of a job? You will want to lower your bills as much as possible, and it would have been nice if you would have upgraded your light bulbs when you had the money, because now you can not afford to.

So when you have the extra money to spend, spend it on ways to lower your monthly costs, such as: better light bulbs, better thermostat, better windows, better doors, add solar panels, upgrade old appliances to new ones that use less energy, etc, etc…; all in turn you lower your monthly bills.

Personal example: I use Google products, which means Android. I buy a few movies every month from Google Play store, while I have the extra money. Just in case one day if I don't have money, and I have to cancel my netflix subscription, I will still have plenty of movies to watch on my Android devices(and Roku). I do the same with my music & books.
"It takes money to make money, and it takes money to save money"

Necessary Expenses

The biggest necessary expense is usually the home. Typically, you don't want this to exceed 20% of your annual income. If it does, you need to increase your income andor move to another home that fits into the budget. Otherwise, you will not have enough income left over to get ahead of the financial curve.
If you own your home, then great! Make sure you are on a fixed rate, and if you are not then refinance it when interest rates are low to get it switched to a fixed rate. On the average median home, you can lower your monthly payment on average by $100 a month for each $10,000 extra you pay on it. At minimum, a second part-time job at minimum wage is enough to earn you an extra $10k a year.

If you own your own home, then you should also consider putting solar panels on your roof to lower your power utility.

Unnecessary Expenses

The biggest unnecessary expense is car payments. A new car payment plus the additional collision insurance, doesn't make it worthwhile unless you're earning the extra overhead to justify it. It's a few hundred to several hundred dollars extra expenditure per month, that you would not have if you just bought a used car outright. I would never recommend a new car unless you had all your affairs in order and had the extra money. Not to mention that's extra money you could be using to lower your mortgage or to buy a house.

Examples of changing service providers for a better value

Cable or Satellite entertainment television on average cost $45 a month. By switching to Netflix which costs $10 a month, you will save $30 a month on entertainment television. You'll just have to do without your day time television and sports channels. Although, there is a free app called Pluto for SmartTV, that has some sports and some day time television.

Landline phones cost on average $45 a month or $540 a year, and 99% of them use the internet. Save your money by switching to Magicjack, which also uses the internet in the same way, is no different, and only costs $40 a year, which comes out to $3 a month. This will save you $42 a month.

Cellular costs on average $65 a month per line, which comes out to $780 a year. By switching to Mint Mobile, it only costs $180 a year per line, which comes out to $15 a month. This will save you $50 a month per line.

Just using the three examples above, you could save a minimum of $120 a month. Just do your research as to what is offered in your area and find the best value, or biggest bang for your buck.

In closing

I hope this article helped you understand better your cost of living and how to improve it.


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