Everyone from consumers to economists to politicians is talking about the cost of living. But what does “cost of living” really mean, and can understanding it help you budget better?
Let’s take a deeper look.
What Does the Cost of Living Mean?
The cost of living is the amount of money households need to cover the basic expenses of life. The Bureau of Labor Statistics publishes the consumer price index, a list of prices consumers pay for goods and services. But there is no official cost of living index published by the federal government.
However, an organization called the Council for Community and Economic Research (C2ER) publishes cost of living indexes. They are issued quarterly and show how much it costs to live in different cities.
“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,” says Jeremy Hill, a regional executive with the Federal Reserve Bank of Kansas City. “Each item included in the basket helps reflect consumer spending.”
“It’s 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% of take-home pay on rent or housing expenses, 10% to 15% on food and 5% to 10% on utilities,” she 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 location because it could vary significantly.
[Read: The 25 Best Affordable Places to Live in the U.S. in 2024-2025]
“For example, it could cost three times as much to live in Irvine, California, as it does to live in Wichita, Kansas. And 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 two ways to calculate your cost of living:
Analyze your finances.One way to calculate your cost of living is to examine your budget — or create one.
[Read: How to Make a Budget — and Stick to It.]
Add up all of your monthly fixed expenses, including your rent or mortgage payment, and figure in your variable expenses like groceries and gas. Also factor in occasional but expected purchases, like new tires. That amount, assuming you aren’t going into debt every month, is your cost of living.
If you need, for example, $500 more a month to avoid borrowing, then add $500 to the amount you’re spending each month to get a 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 has a cost of living calculator, as do various banks and credit unions. Some calculators enable you can to compare cost of living not just between states but also cities.
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, Embers Credit Union’s calculator shows that if you had a $90,000 annual salary in Cincinnati and moved to New York City, specifically Brooklyn, you’d have to earn $148,800 just to maintain your current standard of living.
If you live in St. Louis and decide to move to Honolulu, a $50,000 salary would have to be $101,000 to maintain your current standard of living. But if you left St. Louis for Burlington, Iowa, and earned $50,000, you’d end up with a little more money in your pocket because you’d have to earn only $49,900 in Burlington to maintain the standard of living you had St. Louis.
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 job market is a major factor, says Matías 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 in recent years from the Rust Belt to the South and the West is associated with deindustrialization and the loss of jobs in the Northeast and the 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 made due to 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 decide where to live.
Meanwhile, Hao points out that with more people working remotely, it’s getting easier for some professionals to move to a place with a lower cost of living and keep their current jobs.
What Is a Cost of Living Adjustment?
A cost of living adjustment, also known as COLA, is a bump in pay for 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 they kick in the following January.
If inflation is high, the cost of living adjustment goes up. If it’s low, the COLA will likely stay relatively low, and in some years it may not change at all.
[READ: What Will the Social Security COLA Raise Be for 2025?]
Other Cost of Living Terms to Know
Here are a couple 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 U.S. 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,” he adds.
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,” he 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,” he adds.
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Cost of Living: How to Calculate How Much You Need originally appeared on usnews.com
Update 09/13/24: This story was published at an earlier date and has been updated with new information.
