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 Cost of Living Mean?
The cost of living is the amount of money households need to cover basic expenses. The U.S. Bureau of Labor Statistics publishes the Consumer Price Index, a measure of the average change over time in prices consumers paid for a basket of goods and services. But the federal government does not publish an official cost-of-living index.
However, an organization called the Council for Community and Economic Research publishes cost-of-living indexes. It issues them quarterly, and they show how much it costs to live in different cities.
“This index includes 61 goods and services, representing the basket of goods, which can be broken down into six categories: housing, utilities, grocery items, transportation, health care, and miscellaneous goods and services,” Jeremy Hill, regional executive and assistant vice president of the Federal Reserve Bank of Kansas City, says.
“Each item included in the basket helps reflect consumer spending,” he adds.
The cost of living in the area where you live can have a significant impact on how much of your paycheck goes toward everyday expenses.
A typical personal budget allocates a substantial portion of take-home pay to housing, food, and utilities. Together, these necessities often consume at least half of a household’s income and are major drivers of the cost of living.
So, if you’re considering a move to another part of the country, it’s wise to consider the cost of living in the new location because expenses can vary significantly from one area to another.
An income that provides a comfortable standard of living in one area may cover only necessities in a higher-cost location.
[Read: Guaranteed Income Strategies for Retirement]
How to Calculate Cost of Living
One way to calculate your cost of living is to examine your budget — or create one.
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.
Another way to figure it out is to use a cost-of-living calculator. It can be a useful tool, especially if you’re considering a move.
The compensation software and data company Payscale has a cost-of-living calculator, as do various banks and credit unions. Some calculators enable you to compare cost of living not just between states but also between cities.
[Read: How to Make a Budget — and Stick to It.]
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, at the time of publication, the Payscale calculator showed that if you had a $90,000 annual salary in Cincinnati and moved to New York City, you’d have to earn $221,889 just to maintain your current standard of living.
If you live in St. Louis and decide to move to Honolulu, a $90,000 salary would have to increase to $175,792 to maintain your current standard of living.
But if you left St. Louis for Wichita, Kansas, and earned $90,000, you’d need to earn only $83,496 in Wichita to maintain the same standard of living.
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 based on inflation,” he 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, with more people working remotely, some professionals have more flexibility to move to areas with a lower cost of living while keeping their current jobs.
What Is a Cost-of-Living Adjustment?
A cost-of-living adjustment, also known as COLA, is an increase in Social Security benefits designed to account for inflation.
Since 1975, Social Security benefit increases have been based on increases in the cost of living, as measured by the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W).
The federal government announces the Social Security COLA every October, and the increase generally takes effect with benefits payable in 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: How to Apply for Social Security.]
Other Cost of Living Terms to Know
Here are a couple of 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 covers six categories: food, housing, utilities, transportation, 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.
“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 into eight broad categories: food and beverages, housing, apparel, transportation, medical care, recreation, education and communication, and other,” Vernengo says.
He 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 adds.
“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,” Vernengo says.
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Cost of Living: How to Calculate How Much You Need originally appeared on usnews.com
Update 08/21/26: This story was published at an earlier date and has been updated with new information.
