Measuring the Cost of Living

Understanding the cost of living in an area can help you determine the amount of money necessary to cover basic living expenses. It can also describe the amount of money you will require to maintain a specific lifestyle in a given location. Because the cost of goods and services differs from city to city, calculating the cost of living can identify the affordability to live in a specific town.

Your cost of living will likely change should you move from one part of the country to another. Using a cost of living index can help you decide if changes in pay are sufficient to warrant your change of address. In other words, the cost of living index enables you to compare the prices of living in one city versus another.

What Is Cost of Living?

Cost of living refers to the costs of meeting basic expenses in one location. It determines how far your money will go in a particular locale. It can be done by cities, states, or even some neighborhoods to help people determine the benefits of relocating. Factors that affect the total cost of living in an area include things like:

• Housing costs
• Healthcare costs
• Clothing
• Recreation
• Education
• Food costs
• Utilities
• Childcare
• Fuel
• Transportation costs (car storage, parking, etc.)

It is also a great indicator of how your shiny new salary stacks up against your new living expenses.

How Is Cost of Living Determined?

Most people consult the consumer price index (CPI) for information or calculations related to living costs. It is beneficial for comparing the costs of living between two or more areas. However, it certainly isn’t the only option available. There are many websites online that offer cost-of-living calculators.

As you can imagine, large cities worldwide and throughout the U.S. have higher costs of living. That includes cities like Tokyo, Hong Kong, New York, Beijing, and Singapore. On the flip side, many cities with meager costs of living are poverty-stricken, high-crime cities.

You cannot forget or overlook the importance of taxes when determining the cost of living. It is not just federal income taxes that should be of concern. There are also state and sometimes local income taxes to contend with: property taxes, vehicle taxes, and countless others, which are higher in some locations than others.

Just remember that the basics are not everything. You have to be able to live a little as well. That means you need to consider costs above and beyond living essentials. You should make sure your salary will help you make ends meet while also setting aside funds for savings, investments, and more.

Applying Cost of Living

When you apply the cost of living changes to your new proposed salary, do not forget to factor the numbers with your disposable income for the area in mind. One thing you can do is use online cost-of-living calculators. These can help you determine how much you would need to earn in a new location to maintain your current standard of living.

You may be surprised to learn that your new home has a lower cost of living, so even a slight pay raise will give you more discretionary income. Do not let everything hang on estimates, however. Take the time to look around at rental prices, fuel prices, and even supermarket ads online to see how the numbers stack up in real-world comparisons.

The bottom line is that cost of living measurements can be valuable tools to determine if a job relocation is the right financial move.

Key Takeaways

• Cost of living is more than just assignment of numbers.
• Cities with higher costs of living often offer more amenities and services — at a higher price.
• Even a significant bump in salary may be erased by taking a job in a city that has a much higher cost of living. The vice versa is true as well.
• There are many tools online that can help you determine the cost of living in cities of interest to you.
• Taxes play an important role in higher costs of living too. Do not forget to include all taxes in your calculations.

© Fintactix, LLC 2021

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