Cost of Living: Define, Calculate and Compare

Rachel BurrisJanuary 10, 2020

The American dream was built on the belief that anyone could achieve success and a better quality of life through hard work and sacrifice. However, it has become clear that where you decide to put down your roots has a tremendous bearing on your standard of living. How much money do you need to be able to afford life’s necessities? The answer depends on the cost of living in your area.

Cost of living is an essential consideration when you’re thinking of moving or switching careers because certain regions of the country are more expensive than others. By learning more about cost of living, how it’s calculated and how it differs across the United States, you can gain insight into how much money you need to make in order to maintain a certain standard of living.

What Is Cost Of Living?

Cost of living refers to the amount of money required to afford necessary expenses like housing, food and healthcare in order to maintain a particular standard of living. Cost of living is considered relative to average wages and may be used as a metric in comparing the livability of different cities.

What Is Included In Cost Of Living?

Cost of living is a complex measure because it’s comprised of many different expenses that range dramatically, depending on your geographical area. Trying to wrap your head around it is easiest when you think about where your paycheck goes.

You need to pay to put a roof over your head and food in your stomach. You also need to spend money to ensure that you remain healthy, you can travel to work, and your country can invest in infrastructure and social programming. If you have children, part of your paycheck may go toward education and childcare. And, then, there are those other, miscellaneous costs that can eat up a significant portion of your income.

Let’s take a look at the various categories that make up cost of living so you can get a better sense of what’s included and how much of your salary you can expect to spend on them. Keep in mind that the following percentages are rough estimates, which depend on not only where you live but also what stage of life you’re in.

Housing

Housing is the single largest determinant of cost of living in most areas of the United States, and prices fluctuate immensely based on local real estate market trends. If you’re not ready to buy a home, your housing costs will merely include your monthly rent and utilities. However, if you do want to own your own home, your housing costs will consist of the purchasing price of your new home, your utility bills and your monthly mortgage payments, which will be made up of your principal, interest, property taxes, insurance and association dues – if you’re part of a homeowners association. Regardless, you should expect around 30% of your income to be spent on shelter.

Food

Your food expenses include the items you purchase at the grocery store. Your food costs will consist of everything you fill your fridge and pantry with – dairy products, meats, bakery items, produce, etc. Typically, around 13% of income is spent on grocery items. Although some people may prefer not to cook, dining at restaurants and picking up at local fast-food chains are not included in this category. Eating out is considered a miscellaneous cost, as it’s at a higher price and not a basic necessity.

Healthcare

You should budget about 5% of your salary for healthcare costs. Your health insurance and the copays you are charged for visiting the doctor, dentist and optometrist are included in your healthcare expenses. However, you should also include the money you spend on prescription and over-the-counter medications. Basically, any out-of-pocket expenses that you have for your health fall into this category.

Taxes

The amount of money you spend on taxes will depend on your income bracket. There are seven different tax brackets, with the lowest wage earners taxed at 10% and the highest at 37%. In the United States, the median household income is $60,293, which means that the average American couple is taxed at a 12% rate. However, some married couples choose to file their taxes separately, in which case they may be pushed to a higher tax bracket and taxed at a 22% rate. However, many states and cities also include their own taxes, so you should be prepared to have to spend slightly more, depending on where you live.

Education

It can be tricky to determine precisely how much of an average American’s salary goes toward paying for education because it depends on many factors. The number of students, their ages and whether they attend public or private schools will all greatly impact the cost of education for your household. For young children in public schools, parents can spend around $55 a month to pay for books and supplies. Paying to send kids to private schools would obviously be more expensive and can run around $1,100 per month. As for college tuition, assuming the student does not receive financial aid or apply for student loans, an in-state university could cost $833 per month, while an out-of-state university could cost about $2,500 per month.

Childcare

In some areas, childcare can be just as expensive as rent. Luckily, this tendency is usually only the case in big cities on the East and West coasts. While some parents choose to send their infants and young children to daycare, others decide to hire a babysitter or live-in nanny. Caring for infants tends to be more expensive than for toddlers. Depending on your location, childcare preferences, number and ages of children, you should expect around 6-12% of your income to be spent caring for your young ones.

Transportation

Transportation costs differ depending on whether your location has convenient and reliable public transit options. So, if you don’t have a car, your transportation costs would only include the amount of money you spend on buses, trains, taxis and Ubers. However, if you do drive a car, your transportation expenses would also include the price of your car or car loan, gasoline, maintenance, insurance and parking. Therefore, transportation expenses should make up about 9% of your salary.

Other Necessities

Even after all of these expenses, you’ll notice that there are basic necessities that don’t fit into any of the previous categories. These miscellaneous costs can include goods like clothing, toiletries and entertainment, as well as services like haircuts, dry cleaning and appliance repairs. If there are any expenses that you haven’t seen listed above, you can bet that they fall into this grouping. Prepare to budget around 13% of your salary for these assorted costs.

How To Calculate Cost Of Living

Cost of living is calculated by examining the prices of a wide range of goods and services on which individuals typically spend their money. The goods and services are broken into various categories, like housing, food, healthcare, etc. These categories then have to be weighted based on how much of a person’s budget would be spent on each one.

To determine this weighting, government data that depicts citizens’ spending patterns is analyzed. Since the same goods and services are examined in each geographical location, it’s possible to compare the cost of living in one area to another.

The Cost Of Living Index

The Cost of Living Index enables agencies to calculate variances from one place to another. The Council for Community and Economic Research creates its own Cost of Living Index each quarter to illustrate the cost differences between urban areas across the United States. After receiving pricing data from participating cities for items in the categories of groceries, housing, utilities, transportation, healthcare and miscellaneous goods and services, C2ER sets the category weights and calculates a composite score.

With the national average set as 100, you can see how the cost of living changes between metropolitan areas. Each location is understood as a percentage above or below 100. For example, Juneau has a composite index of 133, which means that the cost of living in this Alaskan city is 33% above the national average. On the other hand, Savannah, Georgia has a score of 90.1, meaning that its cost of living is 9.9% below the national average.

Cost Of Living Comparison (And How To Calculate It)

When you’re thinking of moving, it’s essential to know how much you need to make in order to maintain your current lifestyle. By comparing the cost of living in your current location to that of the area you’re planning on relocating to, you can determine the appropriate salary to ask for.

While there are quite a few cost of living calculators online that will allow you to compare two different locations, you can also do the calculation yourself. With the cost of living index for each area, the formula is relatively simple.

[(City B – City A)/City A] x 100

Let’s say, you currently live in Tampa (City A), which has an index of 90.9, and want to move to Fort Lauderdale (City B), which has an index of 115.1. To compare the cost of living between these two Floridian cities, you would complete the following steps:

1.    Subtract the index of your current city from the index of the city you want to move to: 115.1 - 90.9 = 24.2

2.    Divide the resulting difference by the index of your current city: 24.2 ÷90.9 = .266

3.    Multiply the resulting quotient by 100 to get the percentage: .266 x 100 = 26.6%

So, in order to maintain your current standard of living after moving from Tampa to Fort Lauderdale, you would need about a 27% increase in your income.

Cost Of Living Comparison By City

Since the cost of living can vary dramatically within states, it’s more useful to compare cost of living by city. To determine the cities in the U.S. with the highest and lowest cost of living, we examined the Council for Community and Economic Research’s Cost of Living Index for the second quarter of 2019. The index compares the pricing of goods and services in 255 urban areas across the United States.

For each city ranked, we’ve included the median household income for 2018, as reported by the U.S. Census Bureau's American Community Survey, and adjusted it by the cost of living index provided by the C2ER. This adjustment enables you to gain a deeper sense of the purchasing power of each location, which illustrates how far your money actually goes in that city. All other data presented below are from the C2ER and represent 2019 Q2 pricing.

10 Cities With The Highest Cost Of Living In The US

The most expensive cities in the U.S. tend to be clustered around the East and West coasts. The cost of living in these cities has skyrocketed primarily due to exorbitant housing prices. Although the household incomes in these cities are (for the most part) higher than the national average of $60,293, you still may wonder how residents are able to keep roofs over their heads.

1. Manhattan, New York

·     Cost of living: 142.5% above U.S. average

·     Median household income: $82,459

·     Income adjusted by cost of living: $34,004

·     Median home price: $2,045,349

·     Median monthly rent: $5,133

·     One dozen eggs: $2.48

·     One gallon of gas: $2.93

2. San Francisco, California

·     Cost of living: 101.7% above U.S. average

·     Median household income: $104,552

·     Income adjusted by cost of living: $51,835

·     Median home price: $1,344,190

·     Median monthly rent: $4,323

·     One dozen eggs: $3.79

·     One gallon of gas: $4.04

3. Honolulu, Hawaii

·     Cost of living: 91.4% above U.S. average

·     Median household income: $82,906

·     Income adjusted by cost of living: $43,316

·     Median home price: $1,391,767

·     Median monthly rent: $2,941

·     One dozen eggs: $4.17

·     One gallon of gas: $3.53

4. Brooklyn, New York

·     Cost of living: 83.2% above U.S. average

·     Median household income: $56,015

·     Income adjusted by cost of living: $30,576

·     Median home price: $1,346,308

·     Median monthly rent: $3,320

·     One dozen eggs: $2.43

·     One gallon of gas: $2.93

5. Washington, District of Columbia

·     Cost of living: 63.4% above U.S. average

·     Median household income: $82,604

·     Income adjusted by cost of living: $50,533

·     Median home price: $1,069,329

·     Median monthly rent: $3,002

·     One dozen eggs: $1.71

·     One gallon of gas: $2.90

6. Oakland, California

·     Cost of living: 57.4% above U.S. average

·     Median household income: $68,442

·     Income adjusted by cost of living: $43,483

·     Median home price: $839,663

·     Median monthly rent: $2,572

·     One dozen eggs: $3.59

·     One gallon of gas: $3.98

7. Seattle, Washington

·     Cost of living: 56.1% above U.S. average

·     Median household income: $85,562

·     Income adjusted by cost of living: $54,812

·     Median home price: $813,020

·     Median monthly rent: $2,642

·     One dozen eggs: $1.99

·     One gallon of gas: $3.67

8. Arlington, Virginia

·     Cost of living: 52.2% above U.S. average

·     Median household income: $117,374

·     Income adjusted by cost of living: $77,118

·     Median home price: $918,637

·     Median monthly rent: $2,843

·     One dozen eggs: $2.19

·     One gallon of gas: $2.82

9. Boston, Massachusetts

·     Cost of living: 51.2% above U.S. average

·     Median household income: $65,883

·     Income adjusted by cost of living: $43,573

·     Median home price: $719,537

·     Median monthly rent: $3,548

·     One dozen eggs: $2.03

·     One gallon of gas: $2.64

10. Queens, New York

·     Cost of living: 49.6% above U.S. average

·     Median household income: $64,987

·     Income adjusted by cost of living: $43,441

·     Median home price: $819,600

·     Median monthly rent: $2,818

·     One dozen eggs: $2.73

·     One gallon of gas: $2.93

10 Cities With The Lowest Cost Of Living In The US

The least expensive cities in the U.S. are scattered through the South and Midwest. Notice that the household incomes in these cities are all below the national average. However, because these areas have a low cost of living, they have greater purchasing power. For this reason, the income adjusted by cost of living tends to be higher in these cheaper cities than it does in many of the most expensive, making it easier to maintain a more favorable standard of living.

1. Harlingen, Texas

·     Cost of living: 26.2% below U.S. average

·     Median household income: $38,800

·     Income adjusted by cost of living: $52,575

·     Median home price: $218,333

·     Median monthly rent: $692

·     One dozen eggs: $1.86

·     One gallon of gas: $2.44

2. McAllen, Texas

·     Cost of living: 24.2% below U.S. average

·     Median household income: $47,279

·     Income adjusted by cost of living: $62,373

·     Median home price: $218,500

·     Median monthly rent: $650

·     One dozen eggs: $2.17

·     One gallon of gas: $2.47

3. Kalamazoo, Michigan

·     Cost of living: 23% below U.S. average

·     Median household income: $40,292

·     Income adjusted by cost of living: $52,327

·     Median home price: $214,627

·     Median monthly rent: $522

·     One dozen eggs: $0.69

·     One gallon of gas: $2.60

4. Muskogee, Oklahoma

·     Cost of living: 21% below U.S. average

·     Median household income: $38,885

·     Income adjusted by cost of living: $49,222

·     Median home price: $249,500

·     Median monthly rent: $605

·     One dozen eggs: $1.18

·     One gallon of gas: $2.55

5. Joplin, Missouri

·     Cost of living: 20.8% below U.S. average

·     Median household income: $42,782

·     Income adjusted by cost of living: $54,018

·     Median home price: $195,861

·     Median monthly rent: $794

·     One dozen eggs: $0.89

·     One gallon of gas: $2.55

6. Memphis, Tennessee

·     Cost of living: 20.6% below U.S. average

·     Median household income: $39,108

·     Income adjusted by cost of living: $49,254

·     Median home price: $248,857

·     Median monthly rent: $756

·     One dozen eggs: $1.30

·     One gallon of gas: $2.44

7. Conway, Arkansas

·     Cost of living: 20.3% below U.S. average

·     Median household income: $46,972

·     Income adjusted by cost of living: $58,936

·     Median home price: $265,000

·     Median monthly rent: $688

·     One dozen eggs: $1.18

·     One gallon of gas: $1.53

8. Richmond, Indiana

·     Cost of living: 19.8% below U.S. average

·     Median household income: $37,145

·     Income adjusted by cost of living: $46,315

·     Median home price: $265,000

·     Median monthly rent: $533

·     One dozen eggs: $1.01

·     One gallon of gas: $2.75

9. Tupelo, Mississippi

·     Cost of living: 19.3% below U.S. average

·     Median household income: $48,116

·     Income adjusted by cost of living: $59,623

·     Median home price: $233,000

·     Median monthly rent: $720

·     One dozen eggs: $0.58

·     One gallon of gas: $2.39

10. Amarillo, Texas

·     Cost of living: 18.9% below U.S. average

·     Median household income: $52,543

·     Income adjusted by cost of living: $64,788

·     Median home price: $207,333

·     Median monthly rent: $884

·     One dozen eggs: $1.87

·     One gallon of gas: $2.38

Cost Of Living Takeaways

The cost of living is a crucial concept to understand when planning for your future. You may have always dreamed of living in a big city like New York or Los Angeles, but after considering the cost of living in those expensive cities, you may change your mind. Remember, the cost of living in Manhattan is 142.5% higher than the national average – and in Los Angeles, it’s 46.8% higher. Meaning, your purchasing power would be significantly lower in those cities, which would ultimately cause your standard of living to be worse.

Since housing is a significant factor in determining how expensive it is to live in a particular area, it’s important that you consider the cost of living when buying a home. Compare the cost of living in your current location to the one you wish to settle down in. Doing this comparison ahead of time will let you know if you can maintain your current lifestyle on your salary or if your income will need an extra boost.

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