The economic disparity between the wealthy and the average American is one of the most pressing issues of our time, as the middle class shrinks to the point of being nearly nonexistent. Housing costs are skyrocketing, and incomes are not keeping pace. It’s no wonder most Americans are thinking about how to beat the high cost of living, so they can take control of their futures as opposed to living paycheck to paycheck.
Income Vs Cost of Living: The Numbers
Housing has always been a significant challenge for many Americans, and the income versus cost of living disparity is only increasing in recent years. While homeownership comes with expenses such as property taxes and maintenance, the 35% of the US population who rent are disproportionately more affected by housing expenses than those who own a home.
The widening gap between income and rental rates is challenging an increasing proportion of the population. In 1985, rent was equivalent to 9% of income, on average, but this ratio had risen to 17% by 2020. In this 15-year period, rent in the US housing market went up by 149%, whereas income increased by only 35%. As a result, currently 25% of renters experience a severe financial burden and spend 50% or more of their income on rent.
Accelerating inflation is expected to further exacerbate this problem. Between June 2021 and June 2022 the inflation rate reached 9.1%, the highest level in the last four decades. As rents continue to go up this year, the rise in other living expenses is further worsening the situation for many in the US.
Set against what seems to be a gloomy outlook, here’s how to beat the high cost of living and balance your finances in a smart and sustainable way.
1. Increase Your Income as Much as Possible
The first discernable way to bridge the gap between income and housing expenses is to boost your earnings. This seems obvious, and perhaps unattainable, but the truth is that gig culture and the remote working environment have created nearly unlimited opportunities to make extra cash while retaining your 9-to-5 job.
Whether you can write code, have marketing skills, or speak a foreign language, you can find gig assignments on websites like Fiverr, Upwork, and even LinkedIn. Earning cash on the side is the best way to help offset the increasing rental rates and other costs of living.
In case you don’t have a particular skill set to monetize, there’s no better reason to pick one up. The first step is gaining new skills through online courses, mentorship programs, and other resources. In a few months you can learn enough to become employable in a new field and start making extra money.
In my life, many times I had to work on obtaining a new set of skills before I could move forward. And this ability and willingness to develop new competencies has been a critical factor in my journey to financial freedom.
When you decide on an area to go for, remember to consider not only your interests and talents but also what skills are most sought out at the moment. Check out the most popular job postings on a few websites before you make your choice. To give you a headstart in your journey, some of the most needed gig jobs last year included writers/editors, accounting/finance professionals, and software developers.
With the opportunities out there, not having the right academic degree—or any degree at all—does not cut you out of the workforce and does not mean you should feel unable to start.
2. Beat High Cost of Living Through Investing
The second move to increase your earnings and beat the income vs. cost of living disparity is to invest. As inflation is growing and banks pay almost nothing to keep your cash in a savings account, you have no better alternative to protect your money and make it work for you than to invest it.
And by this I don’t mean investing a few thousand dollars here and there and expecting to start earning enough passive income to quit your job. What I mean is to become a serial investor and put even small amounts of money (at least at first) into various opportunities.
Many refrain from investing because they only consider traditional investments such as rental properties, stocks, and hedge funds that require large amounts of capital and a solid financial background to pull a profit. But investing has changed as technology, tokenization, and digitization have democratized the process for small-scale investors.
Tokenized Real Estate as an Investment Strategy
Tokenized real estate is one of the safest ways to invest small amounts of cash. HoneyBricks, a company I recently invested in, allows you to invest in pieces of professionally managed real estate portfolios through your crypto wallet, combining one of the biggest disruptors in the investment world (crypto currency) with a traditional industry like real estate.
Another investment of mine, Robinland, provides retail investors with passive income by tokenizing institutional grade commercial real estate properties. Using blockchain, this startup decentralizes the commercial real estate market and opens the door to the average investor.
I believe real estate tokenization is a major factor in the democratization of real estate investing. Other investments I’ve made into similar companies you may want to check out include QuantumRE, Akru, and Lofty.ai.
These are just two examples of how you can use tokenized real estate investments to boost your monthly income in a passive way. The lesson here is to think long term and not miss opportunities to make investments, no matter how small they look at first.
3. Do What It Takes to Buy a Home as Fast as Possible (And Use It as an Investment)
Yet another practical step to balance the income vs. cost of living disparity in your favor is to reduce your housing costs.
In the recent surges in the US housing market, renters are more affected than homebuyers. While rental rates went up by 14% year-on-year from May 2021 to May 2022, the increase in home values is forecast to not exceed 11% this year. This means that if you continue renting, you can expect your living costs to continue growing at a rate that most likely goes above the rate of growth of your income.
A lot of people facing the buying vs. renting dilemma decide in favor of the latter as they think that they can’t afford purchasing a home. But homeownership isn’t as elusive a dream as many consider it to be. Most individuals who have spent more than two years in the same industry, maintain a good credit score, and have some savings can qualify for a conventional mortgage loan. And even if you don’t meet all of these criteria, it’s not game over.
Down Payments May be Easier Than You Think
Even the down payment—the most daunting aspect of purchasing a home—does not pose such a challenge. Considering that most lenders require a minimum of 3% of the sale price, and the average home value is $354,000 at the moment, this adds up to a total of $10,620 for a down payment. Something many first time home buyers are unaware of are the many programs that could potentially offer down payment assistance if needed.
Beating Bad Credit
In case your credit score is not great, Fannie Mae is now using on-time rent payments as proof of creditworthiness. There are also government-backed loans tailored for first-time homeowners who don’t qualify for a conventional mortgage. Some of these include FHA loans, VA loans, and USDA loans.
Of course, having good credit is ideal. An option to consider for credit building is Chime, an innovative banking solution that essentially allows you to make cash purchases that count towards building your credit score.
Another strategy you can tap into to make homeownership more affordable is to buy a foreclosure or a distressed property under market value. In many cases you can find highly discounted houses which require just a few months of work before they become fully habitable. Purchasing an upper-fixer is a quick way to force appreciation and gain value in your home.
In addition to living in your own house, you can decide to rent it out traditionally, list it (or parts of it you don’t use) on a short-term rental platform, or sell it for a long-term profit. Historically, the rate of real estate appreciation has always outperformed the rate of inflation in the US market, making properties a reliable hedge against inflation.
You can also buy a duplex, triplex, or another small multifamily property where you live in one unit and rent out the rest. Known as house hacking, this strategy can give you affordable access to homeownership and real estate investment all at once, as you can qualify for a homebuyer loan (as opposed to less favorable investor loans) and get renters to cover your mortgage payments.
The reality is that all economic indicators are pointing in the direction of a growing gap between income and living costs in the US market. The bottom line is that you don’t have to fall victim to this reality. Policymakers, entrepreneurs, and society as a whole are responding to the growing needs of Americans facing unfair financial burdens, and the result has been interesting opportunities to bridge that gap. With the three moves outlined here, you can learn how to beat the high cost of living and use available resources to benefit your future self and your financial goals.