Cost of Living: How to Calculate How Much You Need

Everyone, from consumers to economists to politicians, is talking about the cost of living. It sounds pretty straightforward, but what does “cost of living” really mean, and can understanding it help you budget better — especially at a time when budgets are stretched thin by inflation and rising gas prices? Let’s take a deeper look.

What Is Cost of Living?

The cost of living is the amount of money households need to cover the basic expenses of life. While the Bureau of Labor Statistics publishes the consumer price index, a list of prices consumers pay for goods and services, there is no official cost of living index published by the federal government.

However, other organizations throughout the country publish cost of living indexes. The most prominent was created in 1968 by the Council for Community and Economic Research, or C2ER, according to Jeremy Hill, director of the Center for Economic Development and Business Research at Wichita State University.

[Read: Where Do I Fall in the American Economic Class System?]

The C2ER Cost of Living Index is issued quarterly and looks at how much it costs to live in cities throughout the country. “This index includes over 60 goods and services, representing the basket of goods, which can be broken down into six categories: food, housing, utilities, transportation, health and miscellaneous items,” Hill says. “Each item included in the basket helps reflect consumer spending.” He says about 300 researchers participate in a survey, and they are given instructions on the parameters for the products they need to price. The data is sent to C2ER, which checks for quality and develops the estimates.

“It is important to know the cost of living in the area (we live in) because that is where a big chunk of where our paycheck goes,” says Kate Hao, founder and CEO of Happy Mango Credit, a financial services company. “A typical personal finance budget would call for spending 30% take-home pay on rent or housing expenses, 10% to 15% on food, and 5% to 10% on utilities,” Hao says. “These basic necessities that consume at least half of our paychecks are also what drive the cost of living.”

So if you’re considering a move to another part of the country, Hao says it’s wise to consider the cost of living in the new area compared with the area in which you currently live since it could vary significantly. “For example, it could cost three times as much to live in Irvine, California, as to live in Wichita, Kansas. An above-average income in Ohio can barely cover the basic necessities for living in New York,” Hao says.

How to Calculate Cost of Living

Here are some ways to calculate your cost of living:

Analyze your finances. One way of calculating your cost of living is to examine your budget — or create one.

Simply add up all of your monthly fixed expenses, like rent or a mortgage payment, and your variable expenses, such as groceries and gas costs. Also factor in occasional but expected purchases, such as new tires. The resulting amount, assuming you aren’t going to debt every month, is your cost of living.

If you need, for example, $500 more a month to not go into debt, then add $500 to the amount you’re spending each month to get your more accurate cost of living.

Use a cost-of-living calculator. A cost-of-living calculator can be a useful tool, especially if you’re considering a move. Compensation software and data company Payscale.com has a cost of living calculator, as does, the Federal Reserve Bank of St. Louis. With the latter, you can compare cost of living not just between states but also cities, or as they put it, metropolitan statistical areas.

Cost of Living Estimates

If you compare the cost of living between states or cities, you can get a sense of what your financial life would look like in each.

For instance, using the calculator from the Federal Reserve Bank of St. Louis, if you had a $90,000 annual salary in Cincinnati and moved to New York City, you’d have to earn $122,300 just to maintain your current standard of living.

If you live in St. Louis and decided to move to Honolulu, a $50,000 salary would have to be $68,217 to maintain your current standard of living. But if you left St. Louis for Sheboygan, Wisconsin, earning $50,000, you’d end up with a little more money in your pocket. You would have to earn $49,125 in Sheboygan to maintain the standard of living you had St. Louis for $50,000.

If you live in Illinois and decided to move to Oregon, your $100,000 salary in Illinois would do pretty well in Oregon, where you’d have to earn $101,015, to maintain your current standard of living. But if you look more closely at a particular MSA, you may find that the cost of living is higher than you expected. If you’re earning $100,000 in Danville, Illinois, but you move to the Portland, Oregon, area, in order to maintain your current standard of living, you’d have to learn $128,897. If you move to a more rural part of Oregon, though, you could live more like a Danville, Illinois resident.

And if you’re currently making $100,000 in Portland, Oregon and instead moved to Danville, Illinois, you’d only have to earn $77,581 to maintain your current standard of living. So assuming you maintained your $100,000 salary while living in Danville, you’d find your money stretching much further.

[See: The 25 Best Affordable Places to Live in the U.S. in 2021-2022.]

How to Compare Your Cost of Living

When you’re comparing your current city to a new city or region of the country where you might like to live, you should consider more than the cost of living.

For example, the availability of jobs is a major factor, says Matias Vernengo, professor of economics at Bucknell University in Lewisburg, Pennsylvania.

“People do not tend to migrate simply because of changes in inflation rates. … Employment is what really matters, so it is unlikely that people living paycheck to paycheck would move on the basis of inflation,” Vernengo says.

He adds that the migration we’ve seen from the Rust Belt to the South and the West is associated with deindustrialization and the loss of jobs in the Northeast and Midwest.

Hill agrees that the cost of living generally isn’t a big reason people move. “Most people moving probably don’t check the cost of living or the taxes of the community they are moving to,” he says. “The core decisions, in most instances, are job opportunity, family and quality of life.”

Still, Hill says the cost of living index is a helpful tool for those who are on the fence and trying to determine where to live between two locations.

Meanwhile, Hao points out that with more people working remotely, it is getting easier for some professionals to move to a place with a lower cost of living while keeping their current job.

[See: The Best Places to Live in the U.S. for Young Professionals.]

What Is a Cost of Living Adjustment?

Generally, when people refer to a cost of living adjustment, also known as COLA, they’re referring to a bump in pay on a Social Security check.

Since 1975, Social Security benefit increases have been based on increases in the cost of living, as measured by the consumer price index. The federal government announces Social Security increases every October, and then they kick in the following January. If inflation is high, the cost of living adjustment goes up with it. If inflation is low, the COLA may stay relatively static. In some years it may not change at all.

Other Cost of Living Terms

Here are some key terms to deepen your understanding of cost of living.

COLI. This stands for the Cost of Living Index, which is published quarterly by the Council for Community and Economic Research. It’s the gold standard of cost of living indexes and is used by economists throughout the United States. It focuses on six categories: food, housing, utilities, health care and miscellaneous goods and services.

CPI. This is the consumer price index from the Bureau of Labor Statistics, not to be confused with a cost of living index. “That’s the index that went up 7.5% in the last year, the highest rate of inflation in more than three decades, according to the Bureau of Labor Statistics,” Vernengo says. “The CPI includes the prices of a basket of consumption of goods and services that are widely demanded. There are more than 200 items in the list, subdivided in eight broad categories: food and beverages, housing, apparel, transportation, medical care, recreation, education and communication, and other.”

Vernengo says these baskets are sometimes modified to adjust for consumers’ changing tastes and demands. “These changes sometimes take time, and for that reason the CPI is not always accurate. Personal computers were available in the late 1970s, but only entered the CPI after the mid 1980s,” Vernengo says. “Also, the CPI is adjusted to deal with changes in the quality of goods — for example, the fact that computers have become not only cheaper but incredibly more efficient. The BLS basically collects all the data and creates an index that gives more weight to the goods and services that are more relevant for consumers.”

More from U.S. News

50 Ways to Improve Your Finances in 2022

10 Expenses Destroying Your Budget

How Much Should I Spend on Groceries?

Cost of Living: How to Calculate How Much You Need originally appeared on usnews.com

Related Categories:

Latest News

More from WTOP

Log in to your WTOP account for notifications and alerts customized for you.

Sign up