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What is the cost of living? Definition, examples and importance

Gasoline prices are one of many factors that make up the cost of living.

What does “cost of living” mean?

Cost of living refers to the amount of income needed to maintain a certain lifestyle in a certain place at a certain time. The cost of living varies geographically and temporally, which means that the same lifestyle often costs different amounts in different regions, and in a particular region, this cost may increase (or, in rare cases, decrease) with the time.

For example, suppose an individual can maintain a basic but comfortable lifestyle – including a modest apartment, health care, food, public transportation, and enough extra money to contribute to savings and go out a few times a month – with an annual income of $39,000 in City A, a mid-sized suburb. In City B, a more densely populated metropolitan area, this same lifestyle might require an annual income of $49,000 because rent, food, and other expenses are higher there. In this case, the cost of living is significantly higher in City B than in City A.

Another way to think about the cost of living is to compare what you could get for a certain salary in one place versus another. For example, an annual income of $85,000 in Fort Wayne, Indiana could provide an average citizen with plenty of money left over after things like housing, food, and taxes are taken care of. . In Manhattan, New York, by contrast, that same income could barely cover necessities and leave little left over for discretionary purchases. Indeed, goods and services, including necessities like rent and food, cost much more on average in Manhattan than in Fort Wayne.

Since the cost of living varies from state to state, wages and salaries are higher in places where rent, food, and gas are more expensive. For this reason, similar jobs may pay different amounts in different locations.

What is a cost of living index?

A cost of living index is a handy tool that can be used to compare the cost of living between states (or cities) by assigning each a simple number that represents the overall average cost of a hypothetical basket of goods and services that most people would need to buy to live in any city (eg, rent, groceries, health care, childcare, taxes, etc.). Most indexes use 100 as the base number. This base number is usually associated with a city or region that falls somewhere near the average or median cost of living of all regions sampled by the index.

Thus, a region with an index of 84 would be 26% cheaper to live in than the reference region, and one with an index of 112 would be 12% more expensive. A person planning to move from one city to another could compare their city’s index score to their target city’s index score to find out approximately how much cheaper (or more expensive) it would be to live there. .

How to use a cost of living index to compare regions?

If you want to use cost of living index data to determine how much you would need to earn to maintain your current lifestyle in another location, you can use the following formula:

Income change = (City B – City A) / City A

To note: City A is where you currently live and City B is where you plan to move.

Let’s say you currently live in Colorado Springs, Colorado, and are planning to move to San Francisco, California. Numbeo’s cost of living index gives Colorado Springs a 75.77 and San Francisco a 95.78.

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TheStreet Dictionary Terms

Income change = (City B – City A) / City A
Change in income = (95.78 – 75.77) / 75.77
Change in income = (20.01) / 75.77
Income change = 0.2641 = 26.41%

So if you moved to San Francisco from Colorado Springs, your income would need to increase by 26.41% if you wanted to maintain your current lifestyle.

What is a cost of living calculator?

If you prefer not to use index data to manually calculate how much your salary might have to change if you move, several easy-to-use calculators are available free online from the following companies:

Just enter your current city, your target city, and your annual income, and these calculators can tell you how much more (or less) you’d need to earn to maintain your current lifestyle.

What is a cost of living adjustment (COLA)?

Inflation is more common than deflation, and it drives up the prices of basic necessities like food, rent, and transportation. A cost of living adjustment, or COLA, is an increase in wages, salaries, benefits, or other forms of compensation to keep up with changes in the true cost of living due to inflation.

For example, each year the Social Security Administration reviews whether to increase benefits through a COLA. They make their decision based on the evolution of the consumer price index, one of the most popular tools used to measure inflation. In 2021, the SSA increased benefits by 1.3% and in 2022, when inflation rose at a higher rate than usual, it increased benefits by 5.9%.

Although not mandatory, many employers also conduct salary reviews and offer cost-of-living adjustments (separate from performance-based increases) annually or periodically to help their employees keep up with inflation.

Which US cities have the highest cost of living?

Here are the five most expensive cities to live in the United States:

  • New York, New York
  • San Francisco, California
  • Honolulu Hawaii
  • Boston, MA
  • washington d.c.

Which US cities have the lowest cost of living?

Here are the five cheapest major cities to live in the United States:

  • El Paso, TX
  • Wichita, Kansas
  • Lexington, Kentucky
  • Little Rock, Arkansas
  • Tulsa, Oklahoma

Will the cost of living continue to rise?

While rapid inflation has driven up the cost of living at an alarming rate this year, Ellen Chang of TheStreet cites claims by many economists that inflation has already started to slow.