What Is Cost of Living?
The cost of living is a measurement that determines how much money you need to cover living expenses such as your rent, mortgage, food, healthcare, and taxes.
One can use the cost of living to determine how affordable a city or state is, such as if you are planning to move there.
Wages in an area are often correlated to cost of living as higher wages are required to afford to live in areas with a higher cost of living.
The most widely accepted way of measuring the cost of living for a city, state, or country is the consumer price index, also known as CPI. CPI is a metric published by the Bureau of Labor Statistics.
Other metrics exist to measure the cost of living in an area though all metrics boil down to answering, “how much does it cost to live at a given location day-to-day?”
How is Cost of Living Calculated?
Most commonly, cost of living is calculated by determining the prices of commonly purchased goods and services.
This is broken down into categories such as housing, food, and healthcare and then averaged based on spending habits and individual budgets.
When determining where to live, you might opt to live somewhere where your dollar goes further, but a drawback could be that you’ll expect a lower salary for the same position you’d get in a city with a higher cost of living.
The Bureau of Labor Statistics surveys around 80,000 items each month to calculate the CPI in the following categories:
- Education and communication
- Food and beverages
- Medical care
- Other goods and services
Comparing the Cost of Living Between Two Places
Using a cost of living calculator, you can determine how your cost of living will change if you move from where you are to where you’re thinking of going.
The calculator breaks down the costs of various goods and services, such as food, housing, utilities, healthcare, and transportation.
If you’re thinking about moving or retiring to another city, state, or country, you can use cost of living calculators to help you determine how much money you’ll need to get by comfortably.
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What Is A Cost Of Living Adjustment (COLA)?
Wages and benefits need to keep up with rising costs of living. The Social Security Administration (SSA) assesses cost of living annually and increases benefits as needed. This is called a cost of living adjustment, or COLA.
How To Keep Up With Cost of Living Increases
Arguably the most straightforward way to keep up with cost of living increases is to earn more money, however, that’s not always possible.
If you get a raise each year that outpaces the cost of living increase for that year, then you’re in a good position. But, if your salary increase falls behind the rising costs of living, then you’ll want to find ways to make your dollar go further.
Some ways to cut back slightly include:
- Going out to eat one less time per month
- Buying a less expensive car next time you’re in the market for one
- Review your credit card and bank statements and cancel unused subscriptions
- Ask your employer if you can work remotely
What’s the Difference Between Cost of Living and Inflation?
Cost of living and inflation have similarities, but there are some specific differences between them.
Cost of living is subjective to the individual as it measures how much it costs to live a desired lifestyle. On the other hand, inflation is a macroeconomic concept that measures how the cost of goods and services changes for everyone.
While inflation can influence cost of living, it’s possible that inflation can cause prices to rise for everyone, while a specific individual could cut back their cost of living when this occurs.
Additionally, inflation is typically used to measure national changes in CPI, whereas cost of living measures local CPI changes.
Dave is a Certified Educator in Personal Finance (CEPF®) and is passionate about spreading financial literacy. He founded Clean Cut Finance in 2021 and has been featured on websites like Yahoo! Finance, MoneyGeeks, and GoBankingRates. In his spare time, Dave enjoys experimenting in the kitchen, racing simulation, and reading.