Your cost of living, in many respects, determines your quality of life. While many people associate the cost of living with the income they make minus their living expenses, it’s more than that. Additionally, keeping track of your cost of living is important if you hope to build any kind of wealth. If you’d like to see if the cost of living in your area supports wealth-building, you’ll want to take a look at the following information.
Defining the Cost of Living
To sustain your lifestyle, you need to make a certain amount of money in order to live in a certain place. Your income must cover your basic expenses like medical care, housing, and food. Taxes are included in that number as well.
Influences on the Cost of Living
The cost of living varies all over the world. How much it costs to live in a place can, therefore, dramatically impact how much money you are able to accumulate. For example, say that you live in New York City and your income is $40,000 a year before taxes, which breaks down to roughly $3,333 per month. A sample of the cost of living breaks down as follows:
Rent on a furnished studio: $2,800.00
Utilities: $126.00
1 pair of jeans: $54.00
Taxi trip, basic tariff: $16.00
Cost: $2,996.00
Salary before taxes: $3,333.00
Leftover: $337.00
This total doesn’t include basic items like food, taxes, or much else on the items you’d need to buy daily. As you can see, there’s no much of an opportunity to build wealth here.
Let’s now compare the same items and same salary for a person living in Quito, Ecuador, that nation’s capital:
Rent on an apartment, 1 bedroom in City Center: $332.14
Utilities: $69.50
1 pair of jeans: $68.75
Taxi trip, 1 hour waiting, normal tariff: $8.00
Cost: $478.39
Salary before taxes: $3,333.00
Leftover: $2854.61
Again, items like food and taxes have not been taken out. The difference is still dramatic. The same amount of money goes further in Ecuador than it does in New York City. The New York City resident can take some steps to alter his cost of living like live in a cheaper place in New York, cut transportation costs like getting cheap auto insurance online (if he owns a car), or try to make a higher salary. The plain fact of the matter is the cost of living in New York is just higher than it is in Ecuador.
Benchmark Cities
There exists a cost-of-living index. This index compares the cost of living in major cities around the world. As of 2016, New York City was the benchmark city for all other cities in the United States. This is why the comparison above used two major cities. Additionally, it doesn’t cost as much to live in other major cities, even in the U.S. For example, if you live in Reno, Nevada, you’re going to pay 43% less to live there than in New York.
The Cost of Living and Retirement
Your city’s cost of living affects your whole life, from the time you start working until you retire. People are told to stock away enough money to have 80% of their salary available to them when they stop working. Keep in mind that when they retire, this will be a fixed income.
In other words, they need to save enough money during their working years so that when they are retired, they are only missing about 20% of their pre-retirement, working income. In the U.S., the cost of living has remained at around $65,000 per year for a two-income household. By this average, then, the retiree would need to have access to $52,000 a year to maintain his current standard of living. For most people, this means having retirement savings into the millions.
But again, cost of living is a tricky thing. As the article points out, the amount of money you have (or more specifically, the amount you keep) isn’t always contingent on the amount you make. Nor is your cost of living separate from where you live as the above example shows. It’s additionally determined by your spending habits. In the case of the Ecuador versus New York example, the retiree who has access to even $30,000 (not the $52,000 in the example) is still going to have a better retirement lifestyle than the person in New York.
Cost of Living Conclusion
Your cost of living is determined by a number of factors, including your take-home income and the geographic region in which you live. An income of $40,000 goes further in Ecuador than it does in New York City. Building wealth is partly contingent on how much money you make, but it’s also determined by how much you keep. If you’d like to build more wealth, it is in your best interest to live where your income goes the farthest.
