How cost of living impacts your finances

Most people are generally aware that how much they spend on day-to-day costs impacts their overall financial picture. However, you may not have ever fully considered the degree to which certain cost of living decisions can drastically affect your financial plan. Where you choose to live is increasingly becoming one of the most important factors in Canadians’ personal finances.

With the housing boom in several of Canada’s urban centres, a mortgage or rental payment can quickly chew up a massive part of your budget. It doesn’t take a genius to figure out that if housing costs take up more than 50% of your net income (lenders are supposed to prevent this from happening, but often figure out a way to make the math “work out”), you’re going to have a difficult time meeting your savings goals.

This is especially true if you had your heart set on a detached home. Square footage costs money – a reality many Canadians didn’t really face while growing up. I’m pretty sure that in Vancouver and Toronto they actually measure real estate by the square inch at this point in order to make the numbers sound reasonable.

Driving your budget crazy

While housing is the dominant theme in Canada’s current cost of living conversation, there are other ways your daily costs can grow large enough to put the squeeze on your long-term financial goals.

Many of us take vehicle ownership as a rite of passage, when in fact it should be recognized for the major luxury expense that it is. Canadians now purchase more SUVs than passenger cars. When you consider the typical usage of a car for the average Canadian, that statistic is pretty illogical from a wealth-building perspective.

If the majority of your driving is commuting and/or includes mostly highway kilometres, then a small fuel-efficient car does just fine. A public transit pass would take up an even slimmer piece of your budget pie. Many folks smarter than myself have suggested that families try to live relatively close to at least one person’s place of work so that they can make do as a single vehicle household and consequently keep cost of living to manageable levels.

Inflate your tires – not your lifestyle

If you were able to keep your cost of living down as you moved forward in your career and increased your earning potential, you would obviously be in an excellent financial position. The problem is that, as humans, we tend to spend more as we earn more. This is often referred to as lifestyle inflation. There is substantial proof that this phenomenon exists, including a recent study reported in the Wall Street Journal: “For every $1,000 increase in the lottery prize, there was a 2.4% increase in bankruptcy filings by the winner’s neighbors over the next few years.”

Clearly it’s important not to let others’ spending influence your cost of living decisions. No one wants to live like a college student forever, but simply increasing your spending habits at the same rate (or faster!) than your net income can put a serious a crimp in your financial plan.

While it’s impossible to cut your cost of living past a certain minimal point, there are some key factors that you can control. The cost of living in Canada’s large cities is unquestionably high, and getting higher every month. Perhaps one of Canada’s “second tier” cities, or even a more rural setting might be more conducive to the lifestyle you want to live?

Think about your square footage needs (relative to wants) and potential commutes when purchasing home to keep your basic living costs under control. Your cost of living isn’t set in stone, and by making sure you are “pound wise” when it comes to major decisions, you can allow yourself to be “penny foolish” once in a while.