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Keeping a close eye on your spending is important, especially when prices are going up. Due to inflation, consumer prices tend to go up every year. If your income stays flat, you'll have less cash at your disposal even if you're buying the same things.

That's why it's important to monitor your spending. To weather a cost-of-living increase, you'll need to make a budget, plan for upcoming expenses and consider whether your lifestyle is affordable.

Track Your Budget

To see how cost-of-living changes are affecting you, make a budget and track how your spending changes from month to month. If you notice your expenditures on items like groceries or gas are creeping up, you may need to make changes in those areas or reevaluate whether your income is sufficient.

Anticipate Change

Take into account any upcoming changes to your expenses. For example, if you're expecting a baby, you'll need to budget for an additional family member, including food, health insurance and (probably) childcare costs. If there's an upcoming property tax hike or a job change that will require you to spend more on your commute, budget for those as well.

Watch for Signs That Your Expenses Are Too High

Once you have a good idea of your budget, it's time to evaluate whether or not you can continue to afford your current lifestyle. One red flag is if you have to put routine expenses, like groceries and utilities, on a credit card and can't pay your bill off each month. If you need to borrow to cover necessities, your situation will soon be unsustainable.

Another sign it's time to cut back is if you aren't able to save money or pay down debt. If you're spending every dollar you earn, your lifestyle is too costly. You could easily find yourself falling behind on your bills in the event of a cost-of-living increase because there's no cushion in your budget.

Finally, look at the percentage of your income spent on rent. The New York Times recommends spending no more than 30 percent of your gross income on housing and utility costs. Although this isn't a hard-and-fast rule, rent that's above this threshold could crowd out room in your budget for other expenses or for savings. In addition, rent that's too high puts your lifestyle at risk, as it will be difficult to afford a rent increase.

Increase Your Income or Decrease Your Expenses

If you determine that your lifestyle isn't affordable in the long term, you have two options: You can increase your income or decrease your expenses. You might be able to raise your income by negotiating a higher salary, but if that fails, your best bet for earning more is to look for a new job with better pay.

To decrease your expenses, try cutting out some luxuries like restaurant spending. You'll probably need to tackle major budget items, such as housing, too. As housing costs and living expenses can vary widely by city and even by neighborhood, you might be able to decrease your costs by moving to a less expensive location or a spot with less square footage.

This information and recommendations contained herein are compiled from sources deemed reliable, but are not represented to be accurate or complete. In providing this information, neither KeyBank nor its affiliates are acting as your agent or are offering any tax, accounting, or legal advice.

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