WallStreetMojo

WallStreetMojo

WallStreetMojo

MENUMENU
  • Blog
  • Free Video Tutorials
  • Courses
  • All In One Bundle
  • Login
Home » Financial Modeling Tutorials » Financial Calculators » Cost of Living Calculator

Cost of Living Calculator

By Harsh KataraHarsh Katara | Reviewed By Dheeraj VaidyaDheeraj Vaidya, CFA, FRM

Cost of Living Calculator

Cost of Living Calculator is meant to compare the cost of the goods or, in other words, the expenses an average individual will expect to incur to acquire shelter, food, transportation, healthcare, energy, education, clothing, entertainment, and childcare in various regions.

Cost of Living Calculator

Prices in Current year/ Prices in Base year


Wherein,
  • Prices in Current year
  • Prices in Base year
$
$

About the Cost of Living Calculator

The formula for calculating the Cost of Living is per below:

Cost of Living = Prices in Current year/ Prices in Base year

Wherein,

Prices calculated in the above formula could be arithmetic average or weighted average. This will be displayed in the examples below.

Although there are many kinds of cost of living indexes which shall use various metrics and variables, most of them will set a base cost of living, which is displayed via 100. The base that is calculated can be either the cost of living in 1 place.

  • For example, Delaware could be determined as the base city and set its cost of living to 100—or the base can be a means of several places. Then Other places will be measured against that base region, and then accordingly, that place will be assigned a cost of living number.
  • For instance, if, on average, it is 30% more expensive to stay in New York than compare to the base city, New York’s cost of a living number will be 130. This is what the cost of living calculator will represent. There are many methods used for the same as the family budget method, which is the weightage average method, and then there is an arithmetic average method.

How to Calculate Using the Cost of Living Calculator?

One needs to follow the below steps in order to calculate the Cost of Living.

Step #1 – Determine which region or region is the cost of living is to be calculated, for example, whether its comparison of the region to region or one period to another period or multiple regions average to another multiple region average.

Step #2 – Now find out the prices of the base, which is to be included in the denominator. The base could be either a year or place, depending upon what the purpose is.

Step #3 – Take out the prices of the region for which the cost of living is to be calculated or the prices of the current year in case the cost of living is to be calculated for a time period.

Step #4 – Since its cost of living is to be calculated, there would be a basket of goods that will be taken into consideration, and prices for base and current will be aggregated.

Step #5 – Either use an arithmetic average for the basket of goods into consideration or weightage average as per the requirement. It is recommended to use a weightage average.

Popular Course in this category
Sale
Financial Modeling Course (with 15+ Projects)
4.9 (927 ratings)
16 Courses | 15+ Projects | 90+ Hours | Full Lifetime Access | Certificate of Completion
View Course

Step #6 – Now divide the respective current year or numerator place average prices by the base year or denominator place as per the calculation required.

Step #7 – The resultant figure will be the Cost of Living.

You can download this Cost of Living Calculator Excel Template here – Cost of Living Calculator Excel Template

Example #1

The statistical department of country X wants to calculate the cost of living for the year 2019, taking 2009 as the base year.

Below are the details for the basket of goods which they feel will represent the best index for the cost of living for food prices.

Cost of Living Example 1

The department wants to use a simple arithmetic average to calculate the cost of living in 2019 based on the information they have obtained.

Based on the above information, you are required to calculate the Cost of Living index for 2019.

Solution:

We are given the prices for both of the years, which is 2009 and 2019.

2009 is the base year, and 2019 is the current year

We will first calculate the arithmetic average for both of the years per below:

Cost of Living Example 1-1

Now we can use the below formula to calculate the cost of living index for the year 2019:

Cost of Living = Prices in Current year/ Prices in Base year

Cost of Living Example 1-2

  • = 28.26 / 20.94 * 100
  • = 135% or 1.35

Hence, food inflation has risen by 35% in the year 2019 when compared with the base year 2009.

Example #2

Mr. V has been offered to locate Washington DC from New York due to a new opportunity for him. However, he was well settled in New York and quite happy and is now concerned with the cost of living expenses over there in New York when compared with Washington DC. He wants to know how much inflation is there in Washington, DC, when compared with New York.

Below are the details of the general average cost of each category obtained from reliable sources.

Example 2 (Given data)

We are given weights that shall be used in the calculation.

Based on the given information, you are required to calculate the Cost of Living.

Solution:

We are given the prices for both of the places, which are New York and Washington DC.

New York is the base region, and Washington DC is the current region

We will first calculate the arithmetic average for both of the places by applying weights first per below:

Example 2-1 (Arithmetic average)

Now we can use the below formula to calculate the cost of living index:

Cost of Living = Prices in Current year/ Prices in Base year

Cost of Living Example 2-2

  • = 7.46 / 6.42 * 100
  • = 116% or 1.16

Hence, the cost of living inflation is greater by 16% in Washington, DC, when compared with New York City.

Conclusion

As discussed above, the cost of living index is constructed to know how the prices of goods have changed across time or across the region, and from that data, one can be inferred how has the economy functioning. There are instances were prices have reduced also, but in most cases, there are prices that have risen.

Recommended Articles

This has been a guide to the cost of living calculator. Here we discuss how to calculate the cost of living to compare the cost of the goods along with step by step examples. You may also take a look at the following useful articles –

  • Formula for Cost of Quality
  • Simple Savings Calculator
  • Headline Inflation
  • Inflation vs Deflation
  • Compound Savings Calculator
0 Shares
Share
Tweet
Share
Primary Sidebar
Footer
COMPANY
About
Reviews
Contact
Privacy
Terms of Service
RESOURCES
Blog
Free Courses
Free Tutorials
Investment Banking Tutorials
Financial Modeling Tutorials
Excel Tutorials
Accounting Tutorials
Financial Statement Analysis
COURSES
All Courses
Financial Analyst All in One Course
Investment Banking Course
Financial Modeling Course
Private Equity Course
Venture Capital Course
Excel All in One Course

Copyright © 2021. CFA Institute Does Not Endorse, Promote, Or Warrant The Accuracy Or Quality Of WallStreetMojo. CFA® And Chartered Financial Analyst® Are Registered Trademarks Owned By CFA Institute.
Return to top

WallStreetMojo

Free Investment Banking Course

IB Excel Templates, Accounting, Valuation, Financial Modeling, Video Tutorials

* Please provide your correct email id. Login details for this Free course will be emailed to you

Book Your One Instructor : One Learner Free Class
WallStreetMojo

Free Investment Banking Course

IB Excel Templates, Accounting, Valuation, Financial Modeling, Video Tutorials

* Please provide your correct email id. Login details for this Free course will be emailed to you

Let’s Get Started
Please select the batch
Saturday - Sunday 9 am IST to 5 pm IST
Saturday - Sunday 9 am IST to 5 pm IST

This website or its third-party tools use cookies, which are necessary to its functioning and required to achieve the purposes illustrated in the cookie policy. By closing this banner, scrolling this page, clicking a link or continuing to browse otherwise, you agree to our Privacy Policy

Login

Forgot Password?

WallStreetMojo

Download Cost of Living Calculator Excel Template

Special Offer - All in One Financial Analyst Bundle (250+ Courses, 40+ Projects) View More