The cost of maintaining a certain level of standard of living is called the cost of living. Changes in the cost of living time to time are often computed in a cost of living index. Sometimes the cost of living is also calculated to compare the cost of maintaining a certain standard of living in different geographical areas. The difference between costs of livings in different geographical areas can be measured in terms of purchasing power equality rates. In this article you will learn step by step how to calculate cost of living.
You have to part your monthly expenditure into eleven basic categories. You have to get basic information from your bank statements, old receipts and bills. You need to compute miscellaneous expenses and you have to determine seasonal fluctuations and changes in your expenditure pattern.
Steps to calculate cost of living
- You have to segregate each and every expense you are responsible for paying on a recurring basis. There are 11 categories in which you have to pay. Those 11 categories are as follows:
- 1. Rent and Utility (Water, Phone, Gas and Electric, Internet)
- 2. Transportation (Gas, Repairs and Maintenance Car Loan)
- 3. Medical, Dental and Life Insurance
- 4. Child Care (or pet Care)
- 5. Food
- 6. Clothes and Shoes
- 7. Entertainment (Theatre Tickets, Restaurant, Community Sponsored Events)
- 8. Magazine Subscriptions
- 9. Credit Card Debt
10. Savings
11. Miscellaneous
Provide a folder, storage file or envelope to each category. Put each original bill of the earlier six months into the folder, storage file or envelope of their respective category.
- Bank statements, receipts, personal notes and paid bills of the earlier six months should be reviewed to find out the expected monthly total (you have to use an estimate amount if you are noticing insignificant fluctuations) for every category. Generally, the law of averages is used to find out the expected monthly expenditure for every category. Add up all the paid costs attributed to each category of the earlier six months. You need to divide the sum and find out the average costs paid for every expenditure. Add up 5% of the paid cost to the final averaged expense total. This number will be the expected monthly expenditure for each category (allowing space to maintain any insignificant fluctuations or nominal fees which can occur during the month).
- Mark the expected monthly expenditure for each category on a sheet of paper or in a financial journal. Add each of the expected monthly expenses for each category to find out the gross monthly amount you have to pay. This figure will show the cost value of the services, goods, products, and expenses attached with your living circumstances as it stands today. To interpret the effect of this figure on your wealth, deduct your estimated monthly cost of living from the income you have received during a one month period (all the income must be available within one month period). You have to obtain a positive number that shows at least Rs 500 surplus. If a positive figure is not been shown then it means you are living beyond your economic wealth. Research on your expenditure patterns to find out which areas can be reduced. But you should not try to reduce costs which are kept aside for savings, accidents and miscellaneous emergencies.
- Add 15% to your total expected monthly cost of living to compute the expected monthly expenditure attached with the miscellaneous category. A brief study of your receipts for last-minute buys, out-of-the-ordinary-purchases and services to cover unexpected expenses, book purchases, unexpected taxi fares, vending machine purchases and so on will give you a general idea of how common miscellaneous expenses occur. This unexpected expenditure generally is equal to about 15% of the total expected monthly cost of living. For example if you spend Rs1, 500.00 in monthly expenses, then you should expect about Rs 225.00 in miscellaneous costs.
- To find out your true financial situation, it is necessary to study your bank statements, old receipts and bills of the earlier six months and that of the previous years. Mark key fluctuations or changes in the cost of living expenditure. Find out changes occurred in the duration of year (Summer Gas and Electric Bills versus winter Gas and electric Bills), changes in your work schedule (More Fast Food Expenses, Increased Gas Costs, Increased Day Care Expenses) or changes in your monthly routine [Summer Break (for students), Exam Period (for students), Full-Time to Part-Time Hrs]. Divide these changes into your cost of living by managing your estimated expenditure accordingly. Make notes of expected extra expenses. As for example you should note down if you are expecting increment in cost of living in June due to summer camp fees or decrement after July because till then you would have paid off your car loan payment or increment because you are about to start the fall semester at your local college in two weeks. You can be prepared financially if you know what your expenses are and what you are going to spend in the next six months or in a year.
Calculating cost of living can be tiresome. If you want to ease the process, you can take the help of many online calculators which will calculate cost of living index for you. You need to put the appropriate data in the respective blank fields in the calculator. The calculator will calculate your cost of living automatically for you.
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