What Influences the Cost of Living?

Rose Morrison

Jul 22, 2021


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It’s no secret that the cost of living can be way higher in some places than others. However, it can sometimes seem like a bit of a mystery — why do some places seem to cost an arm and a leg while others can provide plots of acreage for next to nothing?

Although cost of living conversations can seem a bit convoluted, we’re here to break down the influences of cost of living, to help you figure out why exactly it costs so much to live where you want to go — or, perhaps, why you’re getting such great bang for your buck!

What Is Cost of Living?

Before diving into the details, it’s important to understand just what “cost of living” means in the first place. To put it plainly, the cost of living is the amount of money required to cover the basic expenses of living in any given place — food, housing, taxes, health care, transportation and other necessities.

While “basic needs” may have a different meaning to everybody, it’s generally understood that the cost of living doesn’t include things like vacations or going out to eat, but goes beyond the simple cost of rent and utilities. Obviously, different places have different standards for cost of living, hence the fluctuation.

“Chicken or Egg” Situation

One important thing to note about the factors that contribute to the cost of living is that most of them are true “chicken or egg” situations, in which it can be hard to tell if the cost of living is the true culprit of the cost of things or vice versa.

While there are a few notable exceptions, it can sometimes be difficult to discern whether higher living costs are the cause or the result of things like higher wages, taxes, and populations. Regardless, there are a few telltale signs that can point to what cost of living you may be able to expect. Here are some of the heaviest hitters.

1. Minimum Wage

Again, it can sometimes be hard to tell which came first, but usually, minimum wages adjust for higher living costs.

New York City’s minimum wage, for example, is $15 per hour, whereas Georgia and Wyoming drop to nearly 10 dollars below that at $5.15 per hour. This makes sense, as it costs significantly more to live in New York City than it does to live in rural areas.

2. Average Salaries

While this goes along with the minimum wage conversation, higher costs of living tend to indicate higher average salaries in any given place. In order to pay workers to remain in a city sustainably, they need to be able to reasonably afford the cost of living there.

Therefore, taking a pay increase isn’t uncommon when moving to a more expensive city, but that doesn’t always equate to lifestyle improvement.

3. Population Density

Another factor that plays into the cost of living is population density. The more people who want to live in a given place, the more the price of space there will rise. Things like housing will go to the highest bidder, which will drive up the cost of living.

4. Location, Location, Location

One thing that can consistently drive the cost of living up or down in any given place is its geographical location. Places that are remote or inaccessible can often be more expensive, as the cost of transporting even basic things there can be much higher than usual.

The Hamptons are a great example of this, as passing everything through New York City before it can arrive drives prices up. Hawaii is another example, as its island status makes it one of the hardest states to get to.

5. Transportation

The cost, availability, and reliability of transportation is another factor in the cost of living. Large metropolitan areas with reliable, affordable public transportation can cut your need for a car and make your life easier. Cities that make you rely on a car and pay to park it, on the other hand? Not so much.

Alternatively, places where you can rely on your car and have the space to park it can also be money-saving. And, of course, don’t forget the price of gas, which can fluctuate but tends to go up towards the coasts.

6. Housing Costs

The cost of housing is one of the primary factors that can influence the cost of living. Housing is easily the largest expense in most peoples’ budgets. Therefore, the cost of housing can drive up the cost of living, or drive it down and give you a great deal. Even if you don’t own property, the cost of housing can have an impact on rent prices.

While this is often a geographical point, the cost of housing itself can often vary from neighborhood to neighborhood, which means you can find the most reasonable places in your city, even if the city on average can be a bit expensive. It’s all about finding the right places for your needs.

7. Taxes

Simply put, it’s more expensive to live in places with higher taxes. It truly can vary from place to place, as some states don’t have local taxes, while others make up for their taxes with public programs that improve the standard of living for everyone. Even from city to city, municipalities can have different taxes for their residents.

Check out the taxes in any city or state, as they tend to give you a solid indication on the extra cost. Or, you can head to Oregon, Delaware, Montana, New Hampshire, or Alaska, where there is no sales tax at all.

8. The Unemployment Rate

The influence of the unemployment rate on the overall cost of living might not be quite as obvious, but the correlation of the cost of living with the rate of employment is actually decently solid. Usually, the lower the unemployment rate in a city, the more expensive it is to live in.

This might feel a bit backward, as a higher unemployment rate would mean less competition for your professional life and for things like housing. But a lower unemployment rate indicates a stimulated economy, job security, and consistency — all things that are important to an even and reasonable cost of living.

9. The Magnet Effect

On the opposite side of the spectrum from the unemployment rate, the magnet effect can pull people to an area regardless of the cost to live there. The reason why? The industry connections and networking availability that can be linked to certain specific places.

For example, Silicon Valley is a hub of the tech industry, and moving there can be a great move for those looking to find employment in it, regardless of the cost. Los Angeles and New York City are hubs for those in the entertainment industry, and even though they’re expensive, they offer the best opportunities. Essentially, it pulls people to certain places.

10. The Cost of Child Care and Education

If you have children, the cost of education and child care in a given place will absolutely affect the cost of living wherever you decide to go. In larger cities as well as more expensive areas, child care can be more expensive. Additionally, in areas where you may want to send your kids to private schools, the cost of education can add to your expenses.

Generally, education can be a difficult beast because it can really vary from state to state. And because of the way property taxes fund education, the area where you live will likely have a direct impact on the public school system where your kids will attend.

11. Insurance

Although you will likely have to pay for insurance no matter where you live, certain areas will drive up the insurance rates on any number of things. More populated areas can boost the cost of renters insurance, while car insurance can be more expensive in places that have more traffic and require longer commutes.

Take a look at the insurance rates wherever you want to go to make sure you know what the expenses will look like before you get there.

12. Job Availability

Although this is related to the magnet effect, it can go a bit beyond that. Living in an area with more industry variation and job availability can increase the cost of living because it has the potential to increase the average salary. Although this might seem a bit counterintuitive, having more job availability is ultimately a good thing even if it increases the cost of living. It offers more opportunities for growth and more opportunities for sustainable living in one place.

Areas that are more remote or offer challenges when it comes to the industries available often have a hard time retaining new residents due to the lack of job security. On the other hand, places with specific or niche job markets can be great if you have a specific skill set to offer.

What Impacts the Cost of Living?

There are several factors that can impact the cost of living in any given place. From the average salary to the housing costs to the physical location of wherever you’re living, the cost of living can be a very specific thing.

Additionally, things are subject to change with shifts in the economy as well as industry growth in any given area. Do you think you’re getting a good deal where you are?

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