Cost of Living Explained: CPI, COLA, and Your Personal Inflation

Cost of living is what it costs to pay for housing, food, transportation, healthcare, and everything else you need day to day. Ryan explains how it differs from person to person, why the government's Consumer Price Index is a standardized basket that may not reflect your actual expenses, and how cost-of-living adjustments (COLA) at work are typically tied to that CPI number.

Ryan and Aaron work through some good examples of how two people with different lifestyles, one driving long distances, one working from home, can experience the same economic period very differently. The key insight is that you control more of your cost of living than you might think, and building your own rough spending index gives you a much clearer picture of your personal financial health than any government statistic.

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And, as always, Stay the Course!

Transcript

Welcome And Guest Introduction

SPEAKER_00 0:05

Jordan C2 is with the panel of the founder of Alchemy Wealth Management and author of your physical festival. Ryan Nelson, tune in to gain valuable insights and practical things as we simplify complex financial concepts into logistical lessons. From budgeting to retirement planning, this podcast is your go-to resource for mastering financial literacy.

Aaron Hoisington 0:33

Welcome everybody. Like I said, go check that out on Amazon. Recommend it be required reading. And uh that fine author happens to be the uh um the founder of Alchemy Wealth Management as well, uh, Mr. Ryan Nelson. How goes it today, my man? I'm doing well. How are you doing today? I'm doing pretty solid, doing pretty solid. Can't complain. You know, we're uh cruising a lot right along here in the in the year, and uh, you know, everything's you know shaping up the way it should be. I always like to say that. I was like, things tend to work out the way it should be a lot of times, and that's kind of how things are going. So it's it's going well,

Defining Cost Of Living And COLA

Aaron Hoisington 1:17

man. So um, but let's uh let's dive in today if you're ready to get started on the uh um the cost of living. Yeah um I'm sure you've heard that term before. We have. Okay, good. It's gonna have been a short episode, if not. But uh um, yeah, cost of living, or people talk about, you know, the increase to the cost of living, or you might hear like, oh, the cost of living is so high, or things have gone up. And so, you know, I'm almost under the impression of like, what does that actually mean? You know, we hear it in like the news of like, oh, a cost of living increase or a pay increase. So I'm hoping you can kind of break this down for our listeners about like what it is, what goes into it, and maybe some common misconceptions or things that people may not know when it comes to like the cost of living.

Ryan Nelson 1:58

Yeah, let's do it. So yes, so definitely, yeah, so cost of living. Um, typically what you'll hear, I think, is when it comes to those adjustments,

Why Cost Of Living Differs By Person

Ryan Nelson 2:06

it'd be uh cost of living adjustment or cola. So you probably heard the term cola as well. Um, so oftentimes people when they're talking like at work or something and they get a pay increase, it might be a cola increase. So it's just representative of a everything costs more this year, we're gonna pay you a little bit more, kind of relative to the cost of everything going up, right? Sure. So what is cost of living? So it's the price, it's basically the cost of living, uh the cost of everything to um live that you need to live every day. Um, so like housing, groceries, gas, utilities, insurance, childcare, health care, taxes, right? Entertainment, going to the movies, getting your sushi, whatever, right? So that's your cost of living, is what it costs to live your life. Right? Um But what's interesting is you know, people will argue about, you know, what what did the like what how much did cost of living increase, right? Some one person might say it went up five percent, another person might say it went up four percent, another person might say it went up three percent. And what's interesting is well, that might be true for all of those different people, right? Sure. One person might drive all uh drive a whole lot, so a big piece of their expenses is gas. And another person might not drive much. They work from home, but they bought a really big home, and so insurance on their home is a big piece of their uh expenses. And maybe another person has uh doesn't even own a home, just has an apartment and but still works from home, so doesn't drive a lot, um, but walks downtown to grab a meal every night for dinner, right? And so eating out is a big piece of their expense. And so you can see how depending, you know, what happens with insurance prices or what happens with gas prices or what happens with the cost of food, these different people could have different perceptions or or their individual cost of living could change, right? So the basket of sort of goods that you're measuring isn't gonna be the same for everybody. Um, that being said, what cost of living is not, it's not your personal budget, it's not your salary, it's not like the stock market, um, and it's not a single number that really fits everyone. Um, but that being said, so what people are generally talking about when you're hearing about cost of living, people are oftentimes talking about inflation, which is just things costing more every day, right? Um, or they're talking about the the cost of living comparison, so either year to year or city to city. So you might see what the cost of living is in um San Francisco versus Reno. Right. Somebody living in San Francisco probably pays more than somebody living in Reno for the same lifestyle. Sure. Right. Um and then cola is that increase um that that like planned increase that can keep up with these cost of living increases. Um so for most people, the main thing that's gonna affect this is housing. Again, we gave some examples earlier where

CPI, Inflation, And Raises

Ryan Nelson 4:57

maybe for one person gas is the main driver, for another person, maybe uh cost of food is the main driver. But in general, from a population standpoint, the biggest driver is gonna be um housing. And the biggest one of the biggest drivers of that is mortgage rates, which is tied directly to interest rates. So you can imagine how all of these things sort of tie together. Um but now if we were to kind of apply this to the sort of real world, so to speak, there's something called CPI, which I think we've talked about on a previous episode, but that's the consumer price index. And so this is a government statistic that they put out that tries to represent this cost of living um sort of generally. And so this is a standard basket of goods, so to speak. So it might not be, you know, like we just said, there might be three different individuals with kind of three different lifestyles where their cost of living is all different, right? This is a government metric, CPI, that tries to standardize this and has a standard like basket of goods, if you will. Interesting. Yep. And so oftentimes when you're looking at like cola increases at work, right? Usually your work is using like a CPI, probably a government statistic, right to gauge how much they should be giving you. Um, but again, your true, so the CPI, this government number might say one thing, your true cost of living might have done something different, right? So again, if you if you're spending a lot of gas and gas went up a lot, you might say, man, it feels like I'm spending a whole heck of a lot more, uh, even though this CPI number's saying it didn't go up by that much.

Aaron Hoisington 6:27

Right. Or or it could be like, I mean, you just say you change jobs where you say you were commuting every day to you know 50 minutes each way. Now you get a job that you work from home, suddenly you're instead of spending you know 200 bucks a week on gas, you're now spending, you know, 20 or something like that. And you're like, wow, I mean, it's everything's saying on the news that cost of living is through the roof. And I'm like, I don't know about that, kind of thing. So I get I I get now it kind of makes sense like why it's like kind of a generalization, that basket, but it's like not an end-all be-all for each individual person with it too.

Ryan Nelson 6:57

So yeah, and you'll hear people say, like, uh, you know, or like um you might hear on the news like, oh, inflation is under control, you know, or inflation is back at like or near the target, but then you say like you're looking at your own spending and you're and you might think, man, it doesn't feel like it. It feels like I'm spending a lot more. Um, and those two things could both be true. It could be that that this general sort of basket of goods that the government measures for CPI that they try to use as sort of representation of the country as a whole, isn't maybe super relative to you. And so it's possible that maybe this is under control, yet for you as an individual, the things that you're spending your money on have increased at a faster rate, right? So both of those could be true. Um,

Retiree Risks And Planning

Ryan Nelson 7:41

why you want to be aware of this of this cost of living is it imagine if you're if you're if your income stays the same, but everything around you starts getting more expensive, you have less money to save for retirement, less money, right, to to to put into your emergency savings, maybe you have to start taking debt. Um so your cost of living is obviously an important variable when it comes to your financial security, if you will. Um for retirees and pre-retirees, it can be challenged, or like a retiree, for instance, could be challenging. They've already made decisions, maybe, you know, if they retired 10 years ago, they will have potentially made decisions 10 years ago to plan for something and maybe already set something in motion. And as this cost of goods start increasing more and more and more, it could adversely affect their goals, right? So when you go through this retirement planning, it's really important that you're factoring in these cost of living increases and doing it in a uh conservative and responsible way.

Build Your Personal COL Index

Ryan Nelson 8:40

Um but if you wanted to go about trying to kind of track this yourself, I think there's three main things you could look at. So if you said, okay, I want to get a feel for this myself, um, you could look at housing, food, and transportation. Sure. Epic three. Yep. Yep. And so then you could start to build almost your own little CPI index, right? Your own Aaron Hoysington cost of living index. We'll call it the uh AH Yeah, that's that's gonna catch on. I can already tell. Yeah, yeah. What is that? A H C L I. Yeah. Rolls off the tongue. Yeah, it really does. And and so you could start to get a feel like, okay, what am I paying for for housing and food and transportation? And then what's interesting is you could look at the previous year and say, what did I pay for housing, food, and transportation the year before? What did I pay for housing, food, and transportation the year before that? And then you could start to see, oh man, I'm paying 10% more year over year, or actually, my expense is barely budged year, you know, right. I'm locked into this mortgage, my I'm paying maybe less in gas. I'm not commuting and and my food, you know, we're it's hasn't actually affected us that much. You might actually see that that while other people, the CPI numbers gone up, you might even look at yours and say, Oh, I've actually spent less, right? Um, so that'd be a way where you could sort of create this cost of living almost index, almost a personalized cost of living index that of course would actually be more relevant to your situation. Um and then another point I want to bring up is these cost of uh these cola raises. So at work, again, you might hear, hey, we're doing cola raises or our raises are based on

COLA Raises: Breaking Even

Ryan Nelson 10:12

cola. And so why that's so important, or how I'd want to think about these, is that you know, if you get a cola raise of three percent, in theory, what that's doing is saying, hey, the cost of everything around you got three percent more expensive. Also, we're giving you a three percent pay increase. So in reality, you just broke even. Right. Right. So if you go, if you go say, oh, cool, we got a cola raise of six percent, and you go say, now that I have more money, I'm gonna go buy a new car. Sure. The reality is you were actually only kind of breaking even, and very likely by going and buying that new car, you've kind of put your hell self behind the eight ball there, right? Um, now that being said, if you had created your own kind of uh it cost of living index for yourself, you might realize, oh, cool, we're getting this six percent cola raise. The costs kind of inflation across the board or cost goes across the board was six percent. But for me, um, I I didn't actually experience that. So maybe you will be in a better spot, or maybe you'll be in a worse spot. Maybe you'll realize for yourself, like, wow, yeah, it makes sense that the general cost of living increased by six percent, but my personal cost of living increased by ten percent, and I only got a six percent raise, I'm gonna have to tighten the kind of tighten the belt or bootstraps or whatever. Um, tighten the belt. So something to think about there. Um I would say from you know, if as you start to think about this, you can't control inflation. Um, but what you can control is things like where you live, what house you choose to buy, right? So you can live again, choose if you're living in San Francisco or a suburb of San Francisco. You can choose if you're living in downtown San Francisco or Reno. You can choose if you're living in Reno again or New York, right? So where you live is big, and then what your housing choice is in that city is big. Are you in a uh an apartment, a condo, a house, a house you can't afford, a house you can't afford, right? So those are gonna be big. Um, what car you're driving? Are you driving

What You Can Control

Ryan Nelson 12:04

a uh you know a $4,000 used car or are you driving a hundred thousand dollar super cool Tesla, right? Um those choices can have big implications. Um and then just reoccurring spending. So yeah, if you're going out to eat every night, take a look at that. Um so uh kind of going back to those big three we talked about before for creating your own, like in theory, personalized index, your housing, food, and transportation, those are the things you can control. So even though you can't control that things are getting more expensive, you can control how often you go out to eat. Yeah. Or you can control what house you buy.

Aaron Hoisington 12:38

That's interesting. The way you kind of break that down, it it does provide you, it's kind of, at least for myself, a little light bulb clicking it. You you do have more control over this than like I think that people are made to believe, if you will. Like I think that like you see like, oh, the cost of living or you know, whatever has gone up by XYZ, and oh my gosh, like you know, it's gone up 7%, and I've only got a 2% raise at work. I'm gonna be far behind on these certain elements. But you really, I mean, there are certain things, sure, that like, you know, I if I you know, I need to eat avocados, and avocados are up 20%, like I'm probably gonna take a hit on avocados, if you will. But you do have a lot, a person does have a lot more control than maybe they might think of. Like when it comes to these things, it's almost kind of comes back to that budgeting piece we've talked many a time before, and like sitting down and being like, okay, you know what? Like the subscription service that we really like, you know, has gone up by 20 bucks a month. Like, okay, do we want to keep that one? Do we want to get rid of something else too? And you can kind of almost like balance those things out with your cost of living in a way. Like, so um that that's interesting. It just how you're talking about that, it kind of makes me think that I'm like, oh yeah, I actually have more control over this and maybe a thought coming into this conversation, if you will.

Ryan Nelson 13:48

And even you know, like you so let's use your avocado example. So let's say avocados went up, you know, uh by a lot, you know, you could start to then still apply your own values to this. So if you say, Man, I really want avocados in my diet, and they went up, man, that stinks. Um, but then you can start analyzing other expenses, and so you could say, well, I do, you know, get uh, you know, the classic example. I go to Starbucks every day, right? Right. So, okay, well, I go to Starbucks every day. It and so then you can start figuring out, well, what do I value more? Starbucks or an avocado? I could I could make coffee at home and buy my avocados or not get the avocados and buy Starbucks. Sure. Neither's right, neither's wrong. Two different people would have two different decisions there and based on their values. And and one person might say, uh, I liked avocados, but eh, that's too bad. Yeah, yeah. I like Starbucks more, right? And another person might say, Oh, Starbucks, I was just doing that because I'm lazy and I didn't want to make my own coffee. Like, I'll make my own coffee because I really value the avocados, right? So it's kind of a silly example, but you it's just another example of how you can apply your values to your financial plan um to get to make your plan work for you. And so yeah, I think you have a lot more control than you think.

Aaron Hoisington 15:01

Yeah, yeah, definitely. That's that's neat to kind of think

Values Tradeoffs: Avocados Vs Starbucks

Aaron Hoisington 15:04

about of like, yeah, hey, you know, like just to and once again recommend sitting down with your financial advisor, your financial planner, whoever it might be, to really think about like, oh my gosh, like I'm gonna increase my lifestyle by this much. Like, can I afford that in these other areas too? So yeah, just kind of coming up with your own kind of cola. Yeah.

Ryan Nelson 15:22

And an interesting there is or thing there is like oftentimes, you know, again, oftentimes it's not the avocado that's destroying our budget. So if we think high level, it's like, oh, it's the hundred dollar meal we got, or it's the bottle of wine we got at the dinner. It's like, oh, if we if we stop buying bottles of wine at dinner, we wouldn't have any problem buying all the months' avocados. That one bottle of wine took all of our avocados. Yep. Or or sometimes we'll see like an example where it's like, okay, we have, you know, we maybe we own a $70,000 car, but we owe $40,000 on it still. So we owe $1,500 a month on that. Okay. So that means that you know we have a $70,000 car, we owe $40,000 on it. What if we were to sell that car, go buy a $10,000, $20,000 car. Now you've just freed up another $1,500 a month plus $20,000 or something up front. Now you have $1,500, $1,500 extra dollars a month. Like things like getting avocados aren't even close to being an issue, right? So then you start to prioritize and you see like, oh yeah, I heard, you know, if this cost of living sucks, it's like avocados going up really that's a bummer. But then you you can maybe as you start dissecting this yourself, you can come to a realization like, oh, avocado is going up by 50 cents, and avocado is not the problem. I bought a car I couldn't afford. Yep.

Aaron Hoisington 16:39

I think a car too is one of those, we've we've mentioned it several times. It's a huge piece of it. Like I feel like a car of like, because when you get a big raise at work or something like that, one of the things that I I people tend to do is like buy a car, upgrade their car and such too. And like uh not to get derailed off of this, but I feel like that is one of those things that you can kind of always look at and be like, For sure, what am I using this car for? Am I just using it to get from point A to point B? Like in that case, do I need the $30,000 or could I do the $8,000 car too? So like I don't know, some uh that's one thing I've kind of looked at.

Ryan Nelson 17:13

And again, there's nothing wrong with either. If if part of your values is having a nice new car, perfect. Um, but then just know you know you can't have your 8k Canida too, right? So it's like, man, if you're complaining about avocados, but you have a $70,000 car, right? Well, okay. If you value avocados, sell the car. If you value the car, cool. That's also makes sense, right? Yep. Um, but it just comes back to looking at your values, and it's like, oh, well, if you don't really value avocados, it's not a big deal. Yeah. And if you do value avocados and not cars, then there's an easy solution, right? So um, yeah, I think it there is just a lot more agency and control than maybe sometimes we think.

Aaron Hoisington 17:47

Yep. Awesome. I like it, Ryan. Anything else to uh to add on this one before we uh before we wrap up to the personal section? Let's move on to the personal section. All right, everybody, hang tight.

SPEAKER_00 17:56

And now to put the personal in personal finance.

Aaron Hoisington 18:03

Welcome back, everybody, to this side of the fiscal

Big Levers: Cars, Housing, Habits

Aaron Hoisington 18:06

physical podcast. I am Aaron. I'm still here with uh Mr. Ryan Nelson. And uh, Ryan, for this uh this episode today, I got a got a question for you. Uh um what's something you're currently working towards? This can be in your personal or professional life. Um, curious if there's uh something that you're uh you're you're you're trying to accomplish these days. Yeah, like a goal. Yeah, like a goal, if you will.

Ryan Nelson 18:28

Yeah, I I think uh I have I I like I'm super goal driven. I like goals. I like thinking about goals, documenting them, like I like like KPA, KPIs, key performance indicators and stuff. And so uh I have lots of goals. I have goals for my like goals that people I'm sure think are like super silly. I have goals for what my resting heart rate would be, what my heart rate variability would be. I got goals on my macros, nutrients that I eat in a day. Um I got uh fitness goals probably around the time of this recording. Um I'll be doing a high rocks. Um so goals around that. Um certainly business goals. I have income goals for myself, income goals for the business. Um, yeah. I so yeah, I I think that I have uh you got a lot. Yeah, yeah, yeah. I I I really like goals. I like I think there's I like that saying, like what is it? Something to the extent of like what gets what gets measured gets improved. Or I can't remember what that saying is. Um, but I think you know it I find for myself at least if I don't, you know, let's take um heart rate variability, for example. Uh one of the main things, at least for me, that's gonna improve heart rate variability is my sleep quality. Um if I just never check my heart rate variability, then it's just gonna be what it is, right? Like just the fact that I look at it every day and I have a goal for what it wants what I want it to be, uh, helps then you know, when at night, like, oh, should I watch this YouTube video? No, I have this goal stated goal of raising my HRV, which means I need to get more sleep, which means I should go to bed now. So now I'm making This small, very small incremental decision, but puts me in a better spot. Whereas if I didn't have that goal, it'd be like, yeah, might as well watch this YouTube video. It's not affecting me anyway, right? Um, so um, yeah, I think I've I've I like I I like goals, so I got tons of goals.

Aaron Hoisington 20:14

What about you? I like it, man. I mean I I I love that. Like it just haven't I I I also I enjoy like I it's funny, I I don't set a lot of goals, but when I do set goals, I get really dialed in. Now I'm like, cool. Like this is like I'm this is it's a goal. I think that I can do this, like let's do this, or like whatever. But I feel like you know, we're in the year 2026 and such now, too. Like uh, you know, last year I maybe mentioned on the podcast, like uh, you know, my wife got you know left her job. We kind of went through a little bit of a financial situation, but I feel like now we're kind of like dialing back in and I really want to dial in like and it's perfect space for it, like our financial piece of like our lives. I was hoping you might say that. Yes. It just so happens I have a meeting tomorrow with Alchemy Wealth Management. But uh I I do think that it's a it's a great opportunity to kind of take stock. I'm 35 years old now. I have a a kid, like this is uh I feel like we're both relatively stable in our our finances right now of really getting like those those outliers, those weird like things that I you know get our debts paid off. Like be like, cool, what do we want to do? What do we want to save for? We now have this like and kind of work towards more of that financial freedom. Absolutely. And I think that that's like my big goal for 2026 is like, cool, this is what I want to do. I want to have a great handle on this to where like if I want to do something, like I can do it, right? Like, but I also want to make sure that my other things are taken care of first. Like so kind of a broad overarching, like you don't really how am I getting there kind of thing. But um, it's definitely like I've taken steps to be like, cool, let's pay this debt off, let's do this. Now we have this extra 400 bucks a month, boom, like let's put it towards this, and now suddenly we're debt-free there, and we can you know start figuring out what we want to do with this money

Personal Segment: Goals And KPIs

Aaron Hoisington 21:53

too. So um definitely a financial, like, you know, that's awesome. I don't know if it's a financial handle or financial control, like kind of on like our lives, like in moving forward here.

Ryan Nelson 22:01

I think um that just kind of makes me think uh so like financial freedom, the way I think about financial freedom. So let's say I have a goal of being financially, you know, reaching financial freedom at like age 50. To me, that would mean at age 50, it doesn't necessarily mean I have to retire at age 50, it just means I could retire at age 50. I'm no longer working because I need the income. I can make decisions that aren't that are no longer like financially based, right? Um, so to me, that's what financial freedom is. Um to me, kind of what I just heard from you would almost be like what you're striving for is like financial freedom light or like financial freedom junior or something, right? And so it'd be like getting you on track for that financial freedom. So it's like, hey, I'm now saving enough money per month to get to financial freedom. It doesn't mean you'll reach financial freedom today or tomorrow or next week or next month, but you're now on track to your plan as opposed to what I find is a lot of people they have stress because they sort of know in the back of their mind, like, I'm not even on track to accomplishing my goals. I'm I'm building more debt, not subtracting I'm moving in the wrong direction, right? And so it sounds to me like what your your goal this year would almost be to not necessarily accomplish financial freedom, because that's probably can't happen in a single year, right? But but to to basically accomplish getting on track for that goal, which which I find does for a lot of people, myself included, create this um almost again, financial freedom light where you know, and now you're saving enough to accomplish this future goal. Now it's alleviated so much stress from you. Um I'll have to think about a term I should call that because that's I'm kind of thinking about like that concept for the first time now, but you we should have a maybe the industry does have a term for that already that um I could steal from somebody else. But seems like there should be a term for that where that in itself reduces a lot of stress on your body.

Aaron Hoisington 23:51

100%. And you just start feeling like even just when you're on track being being a couple months into the year at this point, like you know, being like, oh okay, cool, like having like no longer having X debt or like cool, these credit cards are all paid off now. We don't pay anything in interest for these things. Just getting those guardrails like established, like is huge. And now I'm like, all right, now we have the means and the resources to continue like down this path too. So um I'm curious, I'm curious how it's gonna go throughout the year and such too. So I'm excited about that and kind of getting back on track with everything. So it's a great goal. I love it. A big, big long-term goal, like not something I'm like, cool, I want to lose 30 pounds. Like, um, but maybe I should lose a little weight now that I'm thinking about it, but uh uh but I think that that's something I'm I'm looking looking forward to working towards, like just as a family and as a you know, uh everything and such.

Ryan Nelson 24:37

So that's a great goal, and I think we could just round it out with uh with uh adding a little HR heart rate variability goal to that, and you'll be all set. Absolutely.

Aaron Hoisington 24:46

We we put few few things can't have that added into it. That's what I've learned over the over my over this conversation. So awesome, Ryan. Well, appreciate it. All of us um listeners, let us know your goals. I'd be curious to like see what you guys are working towards here in the in the first second quarter of the year, towards the end of the year, whatever you guys are uh you know, have have those goals. Always curious to see what people are working towards. So uh uh Ryan, with that in mind, I'll let you uh finish us off here, my man. As always, stay the course.

SPEAKER_00 25:14

Thank you for joining us for the Fiscal Physical Podcast. Until next time, happy listening. And as always, stay the course. If you have a question or topic suggestions, please email us at podcast at alchemywealth.com. If you enjoyed today's discussion, subscribe to the podcast to ensure you never miss an episode. And consider leaving us a rating and review on your favorite platform. This helps other listeners like you find the show. For more resources, you can visit Alchemy Wealth Management's website at www.alchemywealth.com or find your fiscal physical, the book on Amazon. We'd be remiss if we didn't mention the personal finances just then. First of all, please don't take anything we say as advised. The pre-seating content is for informational and entertainment purposes only. It's not an offer or a solicitation, nor should it be construed or relied upon for tax, legal, or investment advice. It doesn't consider your personal financial situation or objectives and may not be suitable for you.