Know Your Monthly Cost of Living: The Foundation You Can't Ignore

"How much does it cost you to live each month?"

I've asked this question hundreds of times throughout my career. The responses often include long pauses, uncertain guesses, or honest admissions: "I'm not really sure."

Recently, while doing pro bono work with a local charity helping people rebuild their financial lives, this question has become even more critical. Whether someone is recovering from financial hardship or earning a six-figure salary, the answer to this question determines nearly every other financial decision they'll make.

Yet most people genuinely don't know the answer.

Why This Number Matters More Than Ever

In today's uncertain economic climate—with potential healthcare cost increases, tariffs affecting prices, and ongoing inflation—knowing your monthly cost of living isn't just helpful. It's essential.

This number tells you:

• How much emergency fund you actually need (typically 3-6 months of expenses)

• What income you must maintain to keep your lifestyle

• Whether you can afford to take a new job, start a business, or make a career change

• How much you'll need in retirement

• Where you have flexibility when circumstances change

Without this number, you're making financial decisions in the dark.

The Real Cost of Not Knowing

I've seen the consequences play out in different ways across all income levels.

Through my charity work, I've met families who keep canceling financial planning appointments because they're afraid to face reality. They know something's wrong—the credit card balances keep growing, there's never quite enough in the checking account—but they don't want to confirm their fears.

Meanwhile, during my years in the energy industry, I watched high-earning professionals rack up enormous debt buying new cars, taking expensive trips, and making major purchases. They'd tell themselves they'd pay it off when their bonus came. Then the bonus would arrive, and they'd buy more stuff instead.

Different income levels, same fundamental problem: They didn't know what it actually cost them to live.

The Simple Process That Changes Everything

Getting this number doesn't require complicated budgeting software or hours of work. Here's the straightforward approach I recommend:

Step 1: Gather Your Records

Pull the last six months of:

• Bank statements (checking and savings)

• Credit card statements (all cards)

• Cash spending (your best estimate)

Step 2: Categorize Your Spending

Go through each transaction and group them into categories. Don't overcomplicate this—basic categories work fine:

• Housing (mortgage/rent, property tax, insurance, maintenance)

• Utilities (electric, gas, water, internet, phone)

• Transportation (car payment, insurance, gas, maintenance, public transit)

• Food (groceries and dining out)

• Healthcare (insurance premiums, medications, copays)

• Debt payments (credit cards, loans)

• Insurance (life, disability, etc.)

• Personal care

• Entertainment and recreation

• Miscellaneous

Step 3: Calculate Monthly Averages

Add up six months of spending in each category and divide by six. This gives you a realistic average that accounts for seasonal variations.

Step 4: Add the Hidden Expenses

Don't forget expenses you pay quarterly, semi-annually, or annually:

• Property taxes (if not escrowed)

• Car registration

• Insurance premiums paid less frequently

• Professional dues or memberships

• Subscription services billed annually

Divide these by 12 and add them to your monthly number.

Step 5: Add 5%

Here's a secret from decades of financial planning: You're always missing something. Add 5% to your total to account for the expenses you inevitably overlooked.

Distinguishing Essentials from Discretionary

Once you have your total monthly cost, separate expenses into two buckets:

Essential expenses are what you absolutely must pay to maintain basic functioning:

• Housing

• Utilities

• Basic food (groceries, not dining out)

• Transportation to work

• Essential healthcare

• Minimum debt payments

Discretionary expenses include everything else:

• Entertainment

• Dining out

• Travel

• Hobbies

• Shopping beyond necessities

• Streaming services and subscriptions

Understanding this distinction is critical because:

1. Your emergency fund should cover 3-6 months of essential expenses

2. If income drops, you know exactly where you can cut

3. You can identify how much financial flexibility you actually have

When the Numbers Don't Add Up

Sometimes this exercise reveals a difficult truth: Your expenses exceed your income.

If you discover this, you're not alone. Many people are living this reality right now, with credit card interest rates averaging 24%. When you charge groceries and can't pay off the balance, you're effectively increasing the cost of those groceries by 24% per year.

This is why knowing your numbers matters so urgently. You can't fix what you won't face.

If your expenses exceed your income, you have limited options:

1. Increase income: Take on additional work, ask for a raise, find a higher-paying position

2. Reduce expenses: Cut discretionary spending, find ways to lower essential costs

3. Both: Usually the most effective approach

But you can't make an informed plan without knowing the specific gap you're trying to close.

From Avoidance to Empowerment

I've watched the transformation that happens when someone finally confronts their monthly cost of living.

Recently, I worked with a couple through the charity program. They had five kids and kept rescheduling our meetings. When we finally sat down together and went through the numbers, they discovered they needed to earn an additional specific amount each month to afford a reasonable apartment and cover their bills.

That specificity changed everything. Instead of vague anxiety about "not having enough money," they now had a concrete target. One partner could look for additional work knowing exactly how much extra income would solve their problem.

The anxiety didn't disappear, but it transformed into actionable steps.

This Applies at Every Income Level

Whether you're rebuilding after financial hardship or earning a comfortable salary, this principle remains constant: You must know what it costs you to live.

High earners often assume they don't need to track this number because "there's always enough." But during economic uncertainty, job changes, or unexpected expenses, even high-income households can find themselves in trouble quickly without this foundation.

Your income level doesn't exempt you from needing this information—it just changes what you do with it.

Taking the First Step

If you don't currently know your monthly cost of living, I encourage you to complete this exercise within the next week. Set aside a couple of hours, gather your statements, and work through the process.

Yes, you might discover information you'd rather not know. But here's what I've learned after 30 years in financial planning: The worry about what you might find is almost always worse than the reality of knowing.

Once you know your number, you gain control. You can make informed decisions about emergency funds, career choices, retirement planning, and daily spending. You replace vague anxiety with concrete information and actionable plans.

You can't manage what you don't measure. Start by measuring this.