Everything you need to know about fighting the rising cost of living

Fast facts

  • The cost of living measures how much money is needed to purchase the necessary items.
  • COVID-19 has increased the cost of living in Australia.
  • Housing costs, gasoline prices and groceries are the largest expenses in 2022.

An introduction to the cost of living

How Much Does It Cost to Live in Australia? It’s not just a question of economics in high school. In fact, the cost of living does have a huge impact on your personal finances.

Economists estimate how much it costs to live somewhere by using several different indicators:

  • The cost of essentials.
  • Can people afford these costs?
  • How changes in these costs affect different groups of people.

As the cost of living can vary, it’s important to understand how this affects your personal financial situation – and better still, what you can do about it.

How Much Does It Cost to Live in Australia?

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It depends! The cost of living is the amount of money needed to cover basic and necessary expenses, such as:

These costs can be a useful comparative tool as they vary with time and place of residence in Australia. For example, a person living in the capital will not have the same living costs as someone living in the region.

However, as the cost of living varies from country to country, it is difficult to pinpoint exact pricing. For example Department of the Interior requires international students to show they can meet living expenses of at least $ 21,041 per year (or $ 1,754 per month). Meanwhile, a shared database Expatistan estimates that the cost of living for one person in Sydney is in fact as much as $ 4,874 a month. (Hi!)

Overall, the higher cost of living means that basic expenses have become – well, expensive. This is especially true of low-income households, as they have to spend most of their budget on non-discretionary products like gasoline. Therefore, if the price of gasoline rises, low-income households will be hit hardest.

Therefore, the cost of living is crucial when it comes to personal finances as they show us how the larger economy affects our individual circumstances.

Cost of living and standard of living

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The standard of living describes the level of wealth, comfort, and needs available to someone based on their socioeconomic status and location. On the other hand, the cost of living only describes the price of basic necessities.

There are many factors that contribute to measuring the standard of living, such as:

  • Inflation and domestic economic growth
  • Poverty index and class disproportion
  • Political and social freedom
  • Quality of the environment and climate
  • Income and employment opportunities
  • Access to affordable and high-quality housing, healthcare and education.

For this reason, standard of living is usually a much more comprehensive measure of someone’s situation than the cost of living.

The standard of living also varies greatly in socio-cultural terms, such as race, gender, sexuality, abilities, and age. It can even give us an idea of ​​someone’s “quality of life” or subjective happiness.

However, the cost of living is still a very important factor in understanding how we live. If someone is facing higher living costs, it means that their standard of living – and quality of life – can also have an impact.

Therefore, when it comes to managing your expenses and saving money, base costs are a key part of the equation.

How do we measure maintenance costs? Explaining the consumer price index

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The Australian government estimates the cost of living based on a few numbers, mostly Consumer Price Index (CPI), Cost of living indicators (LCI) i Wage price index (WPI). These statistics all sound similar but have different and important meanings.

“Index” for an economist means “change in value.” Therefore:

  • CPI measure the change in value of consumer goods and services (such as food or healthcare).
  • LCI measure the impact of changing values ​​on different types of household – in other words, how much money the household has to spend to maintain its standard of living.
  • WPI measure the fluctuating labor price or the fluctuating income of households in several different standardized sectors.

For example, suppose the price of food rises. This increase will cause the corresponding CPI to rise as there has been a positive change in value. However, this increase will hurt a fixed income pensioner much more than a young worker with disposable income. Accordingly, the LCI will show different increases in spending for retirees and young workers as a result of the same CPI increase.

Keep in mind that spikes in the price of consumer goods will not harm people’s finances as long as wages also increase. Therefore, it is important to compare wage growth (WPI) with the CPI. In this way, we can see if households are able to keep up with inflation.

In conclusion, by examining the relationship between the CPI, LCI, and WPI, we can see which groups are experiencing additional financial pressure due to price movements in the economy and how this affects their cost of living.

Do we pay more for everyday items? Why the consumer price index matters

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The Consumer Price Index (CPI) gives us a key part of the picture when it comes to affordability, inflation and the cost of living.

Overall, if the CPI rises much faster than households can keep up, it makes the cost of living really expensive – and unattainable for some Australians.

Headline inflation in Australia appears to have risen by 3.5% in 2021, and the cost of non-discretionary items (which low-income Australians spend on buying most of their income) has risen by an astonishing 4.5%. Meanwhile, wages appear to have risen by only 2.4%. This means that commodity prices have risen faster than wages – a sure sign that households have lost some of their purchasing power in 2021.

The CPI is not an ideal indicator. In Australia, the federal CPI does not account for costs such as regional prices or the purchase of fixed-line homes. This means that some of the real cost of living faced by Australians is not reflected in official statistics.

However, the CPI remains an important tool for assessing rising prices in an economy that can help consumers decide how (or if) they can save money.

How do price changes affect you?

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Let’s analyze how changes in the prices of everyday, non-discretionary items can affect your finances.

Home costs

Homes are by far the most comprehensive item in your bank account. Whether you are paying rent, mortgage, or regular utility bills, spending money on housing is non-negotiable.

Some of the home costs that can be easily affected by a change in the CPI include:

All of these expenses can change depending on the fluctuations in the economy.

CONNECTED WITH: Australians spend 37% of their income paying off their mortgage

Car costs

Fortunately, a decent public transport system means Australians don’t always have to cough over a car. But for those who do, here are the key expenses that can change with the economy:

For example gasoline price rose alarmingly fast in 2021, making it an important CPI to watch for this year. All cars, not just personal ones, are also affected by this jump. In 2022, we can see an increase in the cost of public transport, air travel and even internet delivery.

Food and drinks

Grocery shopping is an obvious necessity, so fluctuating food / drink prices have an immediate impact on everyone. Even ten cents increase in milk prices accumulates over time contributing to food desserts both in large cities and in regional areas.

Valuing people for good-quality food can also give them poor nutrition. In the long run, this contributes to significant (and costly) chronic health threats.

What are our biggest expenses in 2022?

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If you are struggling to save, you are not alone. A study by NAB found that debt payments, bills and daily expenses have resulted in one in three Australians suffering from high financial stress.

Here are some critical expenses that will affect people’s budgets in 2022 and how you can manage them.

CONNECTED WITH: 5 tips to better manage your money in 2022

Rent

Experts predict that Australian rents will rise sharply in 2022 after the border reopened. But even if you don’t rent your home forever, you can still plan for the long term.

Home loans

The housing market has recently been volatile with the boom in 2021 and rising fixed-rate mortgages. However, this does not mean that you need to have such finances.

  • While floating rate home loans may be cheaper at the moment, they may soon take over as the most expensive home loan option on the market. The long-term prospects of the housing market should be taken into account when deciding.

Tools

Keeping your lights on and running water obvious, but there are other bills as well, such as gas, internet, and even garbage collection that can sneak up on you.

Savings Accounts

Savings accounts can be an integral part of boosting your finances, so it’s important that they do as much hard work as possible.

  • As the RBA has anchored the money rate at 0.1% since November 2020, returns on savings accounts are not very lucrative at the moment.
  • You can even challenge yourself to save in a fun way or design an impeccable budget to save as much money as possible.

Groceries

While food can be an essential expense, there are ways to save without sacrificing quality.

  • Our research team at Mozo also took the time to thoroughly research and compare the best online shopping options on the market so you can save time and money.

Gas

Even if you can’t control the world oil prices, you can still plan clever ways to cut costs. As cars tend to be more expensive overall, it will be increasingly important to consider all transport options.

Irregular weather caused by climate change

In the past two years, Australians have plagued droughts, bushfires and intense floods. It can be easy to feel helpless, but there are many ways to reduce your carbon footprint when dealing with larger systems at work.

CONNECTED WITH: What does climate change mean for your finances?

How can you save money in 2022?

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While you are not in control of the changing dynamics of the global marketplace, there are many ways to save money and manage the rising cost of living.

Here is a list of tools and guides to help you get started.

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