What Is Cost of Living?

Rose Morrison

May 27, 2021

what is cost of living

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Depending on where you live in the world, it will cost you different amounts of money for your daily needs and wants. Living in a rural community will likely cost less than living in a high-end city or suburban area.

Whether you’re moving to a new neighborhood or are about to start living life on your own, you need to be able to budget how much it will cost you to live, work, and survive so you can lead a comfortable life. Without taking the cost of living into consideration before you move, you could be in for a surprise with how much you’ll be spending to live there. But what is cost of living, anyway?

Defining Cost of Living

The cost of living determines how much you will have to pay to live in a specific country, state, city, or town. People often use it to compare how expensive it is to live in various locations, so those considering moving use cost of living calculations and estimates.

Economists determine the costs of living by researching the prices of goods that people need to survive in various locations. Many people rely on the cost-of-living measure provided by the consumer price index (CPI), published by the Bureau of Labor Statistics (BLS). However, there are many other cost-of-living estimates and calculators available online that are posted by other industries.

Things Included in Cost of Living

You’re now aware of what the cost of living entails. However, what expenses are included in the cost of living estimates? Typically, they are the things you need the most to survive, but also incorporate wants, such as entertainment and clothing.

Below, you’ll find the common factors associated with the cost of living.

Housing

Usually, you’ll end up spending most of your income on your housing situation, whether you’re renting or buying. That’s why it makes up most of the cost of living expenses in the United States. The real estate market often fluctuates, so the cost of living can fluctuate as well.

If you decide to rent a home, housing costs depend on monthly rent as well as an estimated amount you’ll pay on utilities. The cost of living for purchasing a house includes the purchasing price, mortgage payments, and utility bills. People usually spend almost one-third of their income on housing, so expect that no matter where you live.

Transportation

Cost of living also factors in transportation costs. Depending on where you live, you could take public transportation often, so the transportation costs would only include what you would pay for buses, taxis, Ubers, and trains.

Owning and operating a vehicle will cost you a different amount. You’ll have to pay for the price of the car, gasoline, insurance, maintenance, and parking when needed. Moving to a more rural area could cost you more in transportation than moving to a city.

Food and Drinks

Next, the cost of living considers what a resident would pay for food and drinks in any region. This includes things that you would need to survive, so it won’t have any money you spend on restaurants and fast-food chains into the cost of living.

Food and drinks constitute what you would pay for those items at the grocery store. Think of dairy products, produce like fruits and vegetables, meats, bakery items, and anything else you can find at the store.

Health Care

This includes health insurance as well as any money you spend on copays at the doctor, dentist, or any other medical professional’s office.

This also includes money spent on prescriptions and over-the-counter medications. Include any expenses you shoulder for health in this category for the cost of living.

Education

Education costs vary greatly. It all depends on whether you have kids, how many kids you have, and if they attend a public or private school. Also, you could be paying for your own schooling or school loans if you’re a college or university student or graduate.

Costs for education include tuition fees. However, it also considers how much you spend on books and school supplies. Children going to a private school would cost more money than those going to a public school. The cost of living expenses for education could be a couple of hundred to a couple of thousand dollars.

Child Care

Though not everyone has children to take to child care, it’s still considered in the cost of living because it’s necessary for working parents. In larger cities or towns, child care can cost almost as much as, or more than, rent or mortgages.

Child care depends on how many children you have, their ages, and whether you decide to take them to a day care or hire a babysitter or nanny. Caring for children varies, so if this is something you need, it’s best to research it for a specific area to ensure you have the funds for child care services.

Taxes

Tax money, of course, depends on the amount of money you make. They’re a necessary part of life, so they’re included in the cost of living. Different parts of the country have different taxes taken out and that need to be paid.

Plus, cities and states often have their own taxes, so depending on where you live, you could be paying more or less than where you currently live.

Others

Finally, you’ll still have to set aside some of your income for other necessary expenses. This could include entertainment, clothing, toiletries, haircuts, and home repairs. Any additional expense that you can think of probably falls into this category. If you are relocating, look at the cost of living to ensure you can afford to live comfortably there.

How Is Cost of Living Calculated?

Now that you have an idea of everything included in the cost of living, you might be wondering how it’s calculated. Through research and analysis, the prices of goods and services people spend money on are determined in various locations throughout the country. Each expense falls into one or more of the above categories.

The government looks at data that depicts what a typical consumer would spend on each category. Specific expenses could be higher or lower depending on where you live, but you also have to consider the average income in each of those places. Once researchers average these costs, they form indexes so you can look up the average cost of living in a particular location.

The Cost of Living Index allows agencies to calculate the various costs of living in different places. It focuses on costs in major cities and metropolitan areas. That way, people like college graduates or someone looking to enter the workforce can use it as a baseline to weigh their employment alternatives to determine if they can afford to live there.

Many calculators are available for you to calculate your cost of living comparisons. Using the Cost of Living Index, you can use a simple formula or use an online cost-of-living calculator to calculate if you would need an income increase to live in the new area. Again, it’s a wise idea to do this if you are considering moving to a new location.

Understanding Cost of Living Benefits You

With this guide, you should be able to understand the cost of living. Cost of living is especially beneficial when you are planning to move to a new location. It helps you determine how much different your spending will be from where you currently live. If the cost of living is higher, you need to ensure your income will be higher, whether you get a new job or ask for a pay increase.

Remember that what people purchase varies as well. If you like to spend more money, then take that into account. If you’re a saver or don’t splurge on big-ticket items, then an estimated cost of living might be higher than what you’d actually spend. Costs of living are estimates, but they’re average spending amounts for that area.

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