Cost Of Living

Updated on March 21, 2024
Article byKhalid Ahmed
Edited byKhalid Ahmed
Reviewed byDheeraj Vaidya, CFA, FRM

What Is The Cost Of Living?

Cost of living refers to an economic metric that determines the living costs in a city, state, or country. It is based on the Consumer Price Index (CPI) published by the Bureau of Labor Statistics (BLS). People tend to use it as a benchmark while relocating from one place to another as it helps them ascertain whether their new wage will serve their daily expenditure. 

What Is Cost of Living

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Based on this living cost, the salary structure for employees in a cosmopolitan city is adjusted accordingly. For example, if city A requires individuals or families to spend more on basic needs, the wages or salaries offered there must be more. In short, the living cost enables one to compare the living cost in a significant town to the corresponding metropolitan city of a state.

Key Takeaways

  • Cost of living is the minimum expense needed to maintain a specific standard of living at a given place within a certain timeframe. 
  • The expense against the income of an individual or family determines how well the living costs are managed in a region.
  • A living cost index helps to determine whether it is feasible to relocate to another city. Also, it enables individuals to know how much additional income is required to sustain the current lifestyle in the new place.
  • Living cost differs from minimum wage, which refers to the lowest income given to a worker to satisfy their daily consumption needs.

Cost Of Living Explained

Cost of living is the minimum money and resources required to survive in a region. It is one of the most significant metrics to figure out what the expenses of living in a region would be and how much earning one has against it. This cost of living comparison, as a result, gives an individual an opportunity to decide whether they, alone or along with their families, should shift to that area or city or state or nation or they should continue having a life in their existing place.

The living cost takes into account the aggregate average cost of an assumed basket of goods and services across different locations, which varies geographically as different regions have diverse costs related to living in each area. One can measure it by assigning a numeric value to each location, representing the average cost of a uniform basket of goods and services. 

The goods and services include rentals, groceries, childcare, education, healthcare, taxes, transportation, food, lodging, and entertainment. A cost of living index (COLA) helps one easily compare expenses against salaries or wages of two or more city or region options. These living cost indexes use 100 as the primary reference number. This number represents the median or average living cost in the sampled regions and is assigned to each city or state. 

A region with an index score below 100 is considered cheaper than the base index. Also, one with an index score above 100 tends to be more expensive. Thus, if someone wants to move from one city to another, comparing the index with the target location’s index is essential. If the target region’s index falls lower than the base index of the region, it shows that living costs over there would be cheaper. 

As a result, they may consider shifting to the target place for employment or studies. However, if the target location has a higher index value, it indicates that the region is expensive to relocate. Moreover, using a cost of living calculator can help find living costs and determine the respective costs.

Examples

Let us go through some examples to understand the concept better.

Example #1

Suppose Stella lives in City A and earns her living there with a monthly salary of $7,000. She applies for a job in City B and cracks this opportunity at a compensation of $10,000. Though her parents were happy to see the hike that she received, Stella played smart and checked the living index to understand whether she should shift to another city for this job or stick to this one. When she checked the index, she compared the living costs of City A with City B. She found that the standard that she manages in City A with $7,000 would cost her $11,000 in City B. Hence, she decided to refuse the offer and continue to search for a better opportunity.

Example #2

As per the news report published in CNBC on Oct 13, 2022, the living cost of senior citizens is likely to increase with the increase in their income benefit to 8.7% in 2023, which has been the highest jump in the last 40 years. The increase would mean that the older citizen could expect a monetary benefit beyond the $140 every month on an average starting from January 2023. The retiree can expect an increase of more than $146 every month, leading to an increase from $1,681 in 2022 to $1,827 in 2023.

Cost Of Living vs Minimum Wage

Both these terms are often considered synonymous with each other. Hence, it is essential to know how they differ from each other. Let us know the differences between living costs and minimum wages from the table below:

Cost of living Minimum wage
It is calculated by comparing the indexes between two places.This requires a lot of complex calculations to find it.
It relates to every person living in a place. It relates to the working class, allowing them to live without deficiency. 
Retail inflation decides it.The government decides it for the working class.
A costly city would have everything on the higher side, including the living cost.A costly city would have a higher minimum wage.
It measures the cost price of all consumables, durables, and healthcare services.It relates to the amount given to a person for their time and effort for work.
A city with lower living costs would have a lower minimum wage and vice versa.The minimum wage is based on the COLA. 

Frequently Asked Questions (FAQs)

1. Which state has the lowest cost of living?

Mississippi has an index of 83.3 with the lowest housing cost, 66.3% of the national average.

2. How is the cost of living calculated?

It is calculated by comparing the amount consumers spend on buying various goods and services from one place to another. The living cost indexes are prepared, keeping this calculation into account. The values further help individuals decide whether to relocate to another city, state, or country, reflecting a higher living cost.

3. Will the cost of living go down?

This cost depends heavily on inflation. When there is inflation, the most significant cause is demand pressure, which means the living cost will remain. In short, if inflation is persistent, the living cost will remain, too.

4. Which state has the highest cost of living?

Hawaii has the highest living cost index score, 189.9. Despite lower poverty rates, groceries are 50% more expensive in Hawaii than the national average.

This article has been a guide to what is Cost of Living. Here, we explain its examples and differences with minimum wage in detail. You may also find some useful articles here –

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