How Is Cost of Living Calculated?

People like to say money won’t solve all your problems, but it does make life more manageable. If you live in a big city and can’t meet your bills, your income becomes your primary concern. Everyone deserves to make a living that meets their needs, builds their savings and makes life more fun. Whether your current paycheck can do all that depends on how closely it meets the cost of living. But how is the cost of living calculated?

Even if you’ve spent decades building your career, you might not fully understand how it compares with the cost of living. This guide explains how experts calculate that expense and answers many common questions you may have asked yourself in the past. Use this information to take control of your finances and live a comfortable lifestyle while doing what you love.

What Is the Cost of Living?

The cost of living is a phrase people throw around when they’re concerned about annual wages or property tax hikes. You may have heard it before and never found a concrete definition.

The dictionary defines the cost of living as the average cost of necessities like food, housing or services. These purchases feed your family, keep you sheltered and dictate your monthly budget. A recurring mortgage payment would play into this cost, but splurging on an air fryer would not.

Why Do People Need to Know How Cost of Living is Calculated?

You don’t need to research the cost of living in your city as often as you keep up with gas prices or the housing market. There are a few specific times when this calculation comes in handy. Determine if you’re about to make any of these significant steps to see if you need to do more financial research.

Moving to a New City

Packing up and moving to a new city usually requires changing jobs. The income that kept you comfortable in your previous home might not do the same after your move. It depends on how the cost of living compares in both regions.

If your new income barely covers your higher monthly rent payments and increased car insurance, you won’t meet the cost of living in your new town. Calculating this information could save you from moving to a place you can’t afford.

Negotiating a Salary

Most employees get the chance for a salary increase every year. If you need to negotiate your raise with your boss, you’ll want to adjust your income properly by learning about the cost of living in your area.

Property taxes increase rent while necessities like food and clothing get more expensive every year. The cost of living is a powerful negotiating tool and reassures people they’re asking for a reasonable increase.

Expanding the Family

Becoming a parent is a milestone that many people look forward to for their entire lives. It also makes your household costs more expensive. You’ll have to buy extra food and clothing for your kids and possibly move into a larger home to accommodate everyone. If the cost of living keeps those things out of your financial reach, you might not be able to expand your family when the time feels right for you.

Making a Significant Purchase

You might want to buy a car, but it could be more costly to purchase one where the cost of living is high. You’ll have to pay more every month toward your loan due to interest rates and afford more expensive car insurance plans based on regional estimates. 

What Goes Into the Cost of Living?

Now that you know what the cost of living is and when you should know it, it’s time to do a deep dive into the many factors that add up to that final calculation. 

Housing Costs

Buying a house in San Francisco will cost much more money than a rural property in the fields of Mississippi. Numerous factors affect a home’s appraisal, but the location plays a significant role. Demand drives prices for properties in growing cities, along with any schools, restaurants and neighborhoods in a home’s vicinity.

Mortgages, rent and property taxes also play into the cost of living. These calculations may be more influential in some places than others, depending on where you live.

Transportation Fees

There are numerous ways transportation can affect your budget. You might have to calculate the cost of public transportation to work or paying for gas to drive to school. Toll roads and paid parking could also impact your cost of living if you have to use them frequently. Transportation plays an important role in how cost of living is calculated.

Food Costs

Your weekly grocery bill could prevent you from spending money on entertainment or putting it away in savings. Food costs depend mainly on taxes, which vary in different cities and states. Alaskan residents don’t have to pay sales tax on grocery store purchases or otherwise, but people in Tennessee could pay up to 7% in sales taxes on groceries.

Entertainment Fees

Everyone deserves to afford to have fun. It’s part of balancing your mental health and enjoying life. The cost of living also incorporates the average fees for things like concert or movie tickets and other local forms of entertainment.

How Is Cost of Living Calculated?

Cost of living considers these factors and compares the average fees across cities and states. Consumers can compare the prices with publicly available indexes so they’re empowered to make the best financial decisions for themselves.

What Is a Cost of Living Index?

A cost of living index uses the latest data to compare average expenses that every person needs, such as:

• Food
• Shetler
• Energy
• Transportation
• Health care
• Education

Other factors also play into each index, depending on how in-depth the data goes. An index may also focus on a specific location, like a city or region, rather than an entire state or country.

Which Indexes Are Reliable?

The U.S. government doesn’t have a singular national index, so people have to look for data from other sources. These are a few indexes that have become the most reliable to consumers.

Economic Policy Institute

The Economic Policy Institute is a nonpartisan, nonprofit group that researches ongoing economic trends and publishes its findings. It has the most accurate data regarding locations within the U.S. and the cost of living in each city.

Social Security Administration’s COLA

Cost of living adjustments (COLA) occur annually for anyone receiving Social Security benefits. The final calculation shows how inflation interacts with rising fees for necessities. This change relates to reports by the Consumer Price Index (CPI), which tracks numerous items.

ACCRA COLA

The Council for Community and Economic Research publishes the ACCRA COLA to compare prices in urban areas across the country. Their findings affect cost of living calculations by providing a broad overview of spending within mid-management incomes.

Does Inflation Play a Role?

Inflation occurs when the dollar’s worth decreases. The cost of goods and services must increase to maintain market balance when the buying power of a dollar lowers. When inflation bloats prices, the cost of living increases.

One affects the other, but they’re not the same thing. Conflating the two is a common mistake that can cause people to determine their income incorrectly.

Calculate Your Cost of Living

Understanding what goes into the cost of living and where you can get the latest data makes it easier to make financial decisions. Research this information if you’re going to make any significant changes so you’re confident in whatever you decide to do.