Affordable cities lure new migrants with the siren song of affordable living. Look a little deeper and you’ll find the hidden costs that can heavily impact your budget. It’s providing a deeper look at those hidden costs of living in so-called affordable urban areas OverTraders.com. Our aim is to arm you with a realistic picture of the financial realities that await you. This article will explore how healthcare, transportation, lifestyle choices, and taxes can erode the perceived savings from lower housing costs.
The Unseen Costs of Healthcare
Healthcare costs are a huge burden for many people and their families no matter where they live. But even in cities with a more reasonable cost of living, healthcare costs can quickly multiply. This tidal wave of new costs can easily erase the savings you may discover in other places.
Health Insurance Premiums and Deductibles
The largest cost of the healthcare system, besides overall health insurance premium, is easily health insurance premiums. As found by new studies, an alarming majority of insured adults fear that they won’t be able to pay for their monthly health insurance premiums. This is particularly challenging for those with high-deductible plans. Instead, they usually need to spend a huge amount of money out-of-pocket before their insurance kicks in. The financial burden imposed by these costs can be significant, especially for low-income families.
Rising Household Healthcare Spending
Over the last ten years, healthcare spending by consumers has grown every year, making up an increasing portion of total household income. New analysis shows that the share of income that the average American household spends on healthcare skyrocketed between 2009 and 2019. There are a number of reasons leading to this uptick. Escalating costs of health care, increased use of medical services, and changes in payer mix are major factors. All of this means individuals and families are spending a lot more of their budgets on healthcare. This conversion reduces their capacity to invest in other critical needs and discretionary priorities.
Individual and Household Spending on the Rise
The increasing burden of healthcare spending is clear from the perspective of the individual consumer and the average American household. Individual spending per year has shot up, a huge driver being the soaring cost of medical care and prescription drugs. Just as alarming, inflation adjusted spending per household has increased by an even larger 33 percent over that same 10-year span. These statistics illustrate the growing financial impact of healthcare costs. They call for these additional costs to be considered when measuring a city’s affordability.
The High Price of Getting Around
Transportation costs are the second biggest cost, which can eat up all the savings gained by moving to a cheaper city. Low housing costs are one of the lures that draw people to a community. When states control transportation expenses, costs can add up fast, especially in states with poor public transit or long commutes.
Transportation Cost Burden
In most of these highly urbanized regions, the average cost burden for transportation is deeply distressing, taking up more than half of the average household income. As just one example, the average transportation cost burden in Houston recently crossed the 18% threshold. It’s no surprise that over one-sixth of the average household’s income is spent on transportation. This is on top of paying their own costs of mobility—vehicle payments, fuel, insurance, maintenance, etc. This financial strain can be particularly challenging for low-income households, who may rely on personal vehicles for transportation due to limited public transit options.
Vehicle Purchases on the Rise
In many major U.S. cities, the share of household spending going towards car purchases has skyrocketed in the last ten years. This trend is indicative of the fact that people and families are more dependent on personal vehicles for transportation than ever, even with the burden of cost. There are two main contributing factors for this uptick in spending on vehicle purchases. Continued population growth, outwards urban sprawl, and relatively inaccessible public transportation are all key factors in this continuing trend.
Transportation Expenses and Income
In fact, the share of spending on transportation in the US is often found to be inversely related with income. It is well-documented that low-income households have higher transportation cost burdens. In comparison, wealthier households spend much less on the share of these costs. In 2022, low-income households spent an average of 30% of their after-tax income on transportation. This burden further exacerbates the difficulty for low-income people and families who need affordable, dependable transportation.
The Cost of Car Ownership
Most of an average household’s transportation bill is spent purchasing, servicing and fueling cars. This involves costs like car loans, insurance premiums, fuel costs, maintenance, and repair bills. The total monthly cost of owning and operating a car can be enormous, particularly for households with several cars or long-distance commuters.
Lifestyle Choices and Hidden Expenses
Beyond housing, healthcare, and transportation as essential costs lifestyle decisions have a way of inserting hidden costs even when residing in low-cost cities. Though one might consider these costs discretionary, taken together they become significant and erode the economic security of a household.
The Cost of Clothing and Personal Care
Beyond just costs of survival, lifestyle expenditures can come into play such as expenses for clothing, which can cost a significant amount. Clothing costs can vary widely depending on personal preference and set costs due to fashion trends. All of these costs are ongoing, so plan for them and build them into your operating pro forma. The rising cost of personal care also affects the cost of living. From haircuts to grooming products to salon treatments, it can cost you hundreds of dollars a month.
Entertainment and Dining Out
Entertainment should absolutely be a part of your healthy life balance, but it tends to be a big budget line item. We know from research that lifestyle expenses do not cover lifestyle expenses such as dining, which may entail eating out, movies, concerts, and other activities. Entertainment is usually an area where costs can greatly diverge, depending on one’s lifestyle and interests. It’s important to factor these costs into your budget early on.
The Impact of Sales Taxes
Sales taxes are a second major factor to examine when determining how affordable a city is. Sales tax rates differ by city, with many of the highest sales tax rate cities in the country clustered around Nashville. These taxes have a big effect on the final price of goods and services, particularly for low-income people who are likely to be most affected by their spending.
Varying Sales Tax Rates
Sales tax rates differ from city to city, with some cities imposing greater than 10 percent. Given that LA’s sales tax rate is already an extremely regressive 10.25%. San Francisco is close behind with a current CI of 8.625% and San Jose right behind that at 9.125%. Such higher rates immediately raise costs for essentials like food, clothes, and household items.
Additional Fees and Taxes
Other cities, like New York, charge additional surcharges on top. For instance, the City of Industry in Los Angeles County already has a 9.5% sales tax rate that it augments with an extra 1% fee. For the large number of residents who regularly shop in these jurisdictions, these added fees compound the rising cost of living.
### Cities with Lower Sales Tax Rates
The sales tax rate for Honolulu, Hawaii currently sits at 4.5%. These lower rates save consumers money by lowering the overall cost of the goods and services that we all purchase.
Tax Rates for Different Goods
Some cities set varying tax rates for various categories of items, like food or hotel stays. And changes in the tax rate make it iffy at best. They do complicate efforts to accurately estimate the cost of living across just one city.
The Upsides
Though the hidden costs of living in these affordable cities can be steep, so too are their benefits just waiting to be harvested.
Lower housing costs: A lower cost of living often means lower housing costs, including rent or mortgage payments, property taxes, and insurance.
Increased savings: With lower living expenses, individuals and families may be able to save more money for long-term goals, such as retirement, education, or major purchases.
Navigating the Financial Landscape
Being aware of these hidden costs is important for anyone hoping to build a strong foundation for their finances while living in an affordable big city. Understand the cost of healthcare, transportation, lifestyle, taxes, and more. This would be a big step toward helping people, especially those who are relocating, get a better read on what it really costs to live in a given metro area. With this understanding, they will be better enabled to make wise spending decisions and appropriately allocate money on their budget.
Before deciding to move, consider the following:
Investigate the availability and cost of healthcare services in the city, including insurance premiums, deductibles, and access to medical providers.
Evaluate transportation needs: Assess your transportation needs and explore the available options, such as public transit, ride-sharing services, and personal vehicles.
Create a realistic budget: Develop a detailed budget that accounts for all potential expenses, including housing, healthcare, transportation, lifestyle choices, and taxes.
- Consider long-term financial goals: Evaluate how the cost of living in a particular city will impact your ability to achieve your long-term financial goals, such as retirement savings or homeownership.
By taking these steps, individuals and families can make informed decisions about where to live and how to manage their finances effectively. OverTraders.com reminds their readers to do extensive research. They advise conferring with a professional financial advisor to address the unique stresses of city life and achieve one’s personal financial objectives.
