Cost of Living – How to Calculate

Maybe you have been hearing cost of living but you still don’t understand what it means; it refers to the amount of money you would need to take care of necessary expenses and live comfortably in a certain place and at a particular time.

Cost of Living : What it is, Calculating and Comparing

The necessary expenses referred to here include basic necessities such as food, shelter and clothing as well as health care, transportation, education and taxes.

Comparing the cost of living in a particular place with your monthly or yearly income will help you decide if you will be able to settle and live comfortably there. Bear in mind that the cost of things vary from one place to other, as such knowing the cost of living of areas or neighborhoods were you are looking to move to can help you make a better decision.

Over the years, the cost of living of has been on an increase due to inflation. People have to pay much more for essential commodities such as gas and food. The cost of renting and buying houses have also increased and generally people need much more money than was previously required, if they are to live comfortably and easily afford basic necessities.

The U.S. Bureau of Labor Statistics has it that between April 2021 and April 2022, the price of food increased by 10.8%. This is actually the highest rise since the 1980s. Another commodity that has seen an exponential increase in its price is gas and rent prices also keeps getting higher. Apart from inflation, other factors responsible for this increase in the cost of living include the COVID 19 pandemic, the war between Russia and Ukraine, as well as problems with the production and supply chain.

How cost of living of any particular place is calculated

The cost of living of a particular place is gotten by gauging the costs of services and goods that people typically need and consume. The prices of necessities such as food, accommodation, healthcare and transportation are checked with individual budgets as well as spending patterns.

This gives an idea on the cost of living of a particular area and this can then be compared with that of other areas and neighborhoods.

Of the various factors that are considered in measuring the cost of living of a particular location, housing costs is the highest. The Bureau of Labor Statistics has it that 30% of Americans’ budget was for accommodation purposes. Following that is transportation which takes up about 14% of Americans’ budgets.

Comparing the living costs between two cities

Comparing the cost of living between two areas is quite simple as all you have to do is make use of a cost of living calculator.

To achieve this, key in your current location as well as the area where you want to move to and then your income. You will not just get the cost of living difference but you will also be able to know the amount you have to make in the new area if you are to maintain the same standard of living that you have in your current location.

You get to see the difference in prices of necessities such as accommodation and food between the two cities. You can narrow down your search to the commodities that are important to you such as the difference in the price of ground beef, baby food and diapers if you have children and so on.

This really makes decision making easier for you and the best part is that you will be making an informed choice.

Another method that you can use to measure the cost of living of different areas is by visiting government websites where information about the cities will be provided so as to attract home-buyers and encourage people to move in and settle there.

Understanding what cost of living adjustment means

The Social Security Administration (SSA) has to adjust benefits from time to time so as to reflect the changes in the cost of living and to maintain the same standard of living. This change in wages and benefits is referred to as a cost of living adjustment (COLA) and is reviewed yearly.

There was a 1.3% COLA for 2021 as announced by the SSA and this benefited about 64 million Social Security beneficiaries. More so, some states such as New York provide COLA for qualified residents.

How to keep up with the increase in cost of living

Cost of living is not static and would usually increase as a result of inflation. Goods and services become more expensive and purchasing power has to increase in order to maintain standard of living.

In case you don’t know how you can keep up with the increase in the cost of living, allow us to give you some tips.

The very sure way of keeping up with the changing cost of living is to increase your income value. If your income is increasing at the same pace that the cost of living is increasing, then you will have no problems with maintaining the same standard of living.

Of course not everyone can be that lucky so let’s look at another way by which you can keep up. This will involve you making some adjustments in your budget and reducing the amount that you budgeted for discretionary expenses such as vacations and entertainment.

Another way is to switch to public transportation or getting a car that is more fuel-efficient. This way, you won’t have to spend as much on gas, and transportation costs will be substantially reduced thus allowing you to save more money.

Remote work is getting quite popular these days and if that is an option for you, you can relocate to a cheaper area while still getting the same salary thus easily maintaining or even having a higher standard of living.

What is a cost of living index?

A cost of living index allows you to compare the cost of living between two or more locations. This way you can tell the standard of living that your salary or income can afford you in various places.

There is no official cost of living index by the U.S government but the Bureau of Labor Statistics publishes the Consumer Price Index (CPI). The CPI gauges the change in the price of goods and services over time, spanning different locations. Different other organizations also have their own cost of living index which they use to measure cost of living of various places.

Examples of the popular cost of living indexes include;

a. Economic Policy Institute (EPI) Family Budget Calculator
b. Missouri Economic Research and Information Center (MERIC) Cost of Living Index
c. The Council for Community and Economic Research (C2ER) Cost of Living Index

Take note that different indexes focus on different areas. For instance, MERIC index only provides information for particular states while the C2ER index is used for different U.S. cities.

Also note that with majority of the cost of living indexes, the number 100 stands for the national average. Different places then get a number that will be either above or below 100, thus stipulating where they rank when compared with the national average.

The Difference Between Cost of living and inflation

Cost of living and inflation are usually discussed together as inflation directly affects cost of living. Nevertheless, there are differences between the two concepts that we have to take a look at.

While cost of living talks about how much is required to maintain a certain standard of living, Inflation refers to changes in the purchasing power of a currency.

Cost of living is determined by a lot of factors amongst which is the city you live in as well as the standard of living that you avail yourself. When an economy experiences an increase in the price of goods and services which is inflation, it will lead to an increase in the cost of living.

Inflation is usually measured using the CPI. This takes into account goods and services such as housing, food, clothing and gas prices across at a national level. Cost of living on the other hand is usually gauged more locally.