Cost of living: What it is, how to calculate it and how to compare
Cost of living definition
Cost of living is the amount of money required to cover necessary expenses to maintain a certain lifestyle standard in a particular place and time. Necessary expenses can include housing, food, taxes, health care, clothing, education, entertainment and transportation.
Cost of living is linked to income and is used to compare the livability of different cities. Because prices vary from one city to the next, cost of living helps you determine how affordable it is to live in a specific city or region.
How cost of living is calculated
Typically, cost of living is calculated by comparing the prices of a range of goods and services on which consumers spend their money. Costs are broken down by category, like health care, food and housing, and weighted based on spending patterns and individual budgets. As prices are gathered by location, you can determine the cost of living of one area compared to another.
What is a cost of living adjustment?
As the cost of living changes, wages and benefits also need to change to maintain the same standard of living. The Social Security Administration (SSA) sometimes adjusts benefits to keep up with the increased cost of living. This is known as a cost of living adjustment (COLA) and is assessed annually.
The SSA recently announced a 1.3 percent COLA for 2021, increasing benefits for nearly 64 million Social Security beneficiaries. Some states, like New York, also offer a cost of living adjustment for eligible residents.
What is the cost of living index?
A cost of living index lets you compare how much it costs in one area compared to another. By comparing the cost of living in different cities and regions, you can better understand how far your salary can go in different parts of the country.
The U.S. government doesn’t publish an official cost of living index. However, the Bureau of Labor Statistics publishes the Consumer Price Index (CPI), which measures the cost of goods and services changes over time for various geographic areas. Some cost of living indexes use CPI data in their calculations. Several organizations have created a cost of living index to track and report the cost of living in various regions of the country.
Some of the most used cost of living indexes include:
- The Council for Community and Economic Research (C2ER) Cost of Living Index
- Economic Policy Institute (EPI) Family Budget Calculator
- Missouri Economic Research and Information Center (MERIC) Cost of Living Index
With most cost of living indexes, the number 100 represents the national average. Then, cities or regions are assigned a number, either above or below 100, based on how they compare to the national average.
Different indexes track different areas. For example, the MERIC cost of living index only lists cost of living data for specific states. According to the 2021 Q1 data, Mississippi has the lowest cost of living among all U.S. states. The C2ER cost of living index is frequently used by local and state governments and tracks the cost of living in various U.S. cities. According to the C2ER index, the cost of living in Manhattan, New York is 139.12 percent higher than in Columbia, South Carolina.
How to compare the cost of living between two cities
You can easily compare the cost of living between two cities by using a cost of living calculator.
Enter your current city, the city you’re thinking of moving to and your income, and you’ll be able to view the cost of living difference and how much you would need to make in a new city to maintain your current standard of living. The cost of living calculator also breaks down the difference in typical costs between the two locations, including housing, food and other lifestyle costs.
Let’s say you currently live in Joplin, Missouri and make $60,000 a year. You would need to make $67,396.31 to maintain the same lifestyle in Asheville, North Carolina, which has a 12.33 percent higher cost of living than Joplin. However, based on calculations, typical housing costs are 27 percent lower in Asheville.
You can also use this tool to view specific costs of goods and services between two geographic areas. For instance, ground beef costs $4.74 per pound in the Indianapolis metro area but only $3.32 in metro Miami Beach. Using a cost of living calculator allows you to view specific costs that matter to you. If you have children or plan to in the future, costs like baby food, diapers and child care might be higher on your radar than other individuals. It can also help you research potential destinations if you’re planning a move in the future.
You can sometimes find cost of living statistics on state, county and city government websites. Often, this information is used to promote the area to prospective homebuyers thinking of moving there. For example, Galveston, Texas, includes cost of living information on its city website, as does the state of Pennsylvania.
- How to budget money: Tips to get started
- Ways to save money on a tight budget
- Sign up for myMoney to track your expenses