Cost Of Living: Comparison And How To Calculate

Have you recently landed a job in a new city, or are you thinking about making a big move? It's important to understand the cost of living in different parts of the country. Making informed decisions about your finances can make a big difference, whether it's adapting to a job change or just wanting to budget more effectively. In this article, we'll dive into the significance of the cost of living, explore how to compare it between different locations and learn how to calculate it accurately.

What Is The Cost Of Living And What Does It Mean?

The cost of living is how much money you need to support a certain standard of living. This includes your basic expenses such as rent or mortgage, utility bills, food, health care, transportation, education and entertainment. The cost of living can impact your choice of work and where to live.

What Is A Cost Of Living Index?

Understanding the cost of living involves more than just knowing the numbers; it's about comprehending the factors contributing to those numbers. A Cost of Living Index (COLI) allows agencies to calculate differences between locations. The American Chamber of Commerce Researchers Association Cost Of Living Index (ACCRA COLI) is a tool that allows agencies to calculate the differences between specific American locations. It does this by considering expenses such as housing, groceries, transportation, utilities and health care.

The ACCRA COLI was designed to assist policymakers, businesses and individuals in making informed decisions about economic and social policies, business locations and compensation. It measures the relative price levels for housing, groceries, utilities, transportation, health care and miscellaneous goods and services in participating areas. The data for the ACCRA COLI is collected and calculated by the Council for Community and Economic Research (C2ER), which is nationally recognized for its reputable data for use in economic development strategies.

What Is The Consumer Price Index?

Another important cost-of-living index is the Consumer Price Index (CPI), which is also put out by C2ER. Though both measure changes in the cost of living, they provide different metrics and use different methodologies.

The CPI is often used as an indicator for inflation. It measures the changes in price over time of standard consumer goods and services, which includes but is not limited to health care, housing, clothing, education, food and transportation.

What’s Included In The Cost Of Living?

Now that you know what the cost of living is, let's examine the specific elements that typically make up these indexes. We’ll also look at the overall index of each element according to the U.S. Bureau of Labor Statistics.

• Housing: Housing costs significantly impact a person's cost of living. Rent or mortgage payments, property taxes and insurance all contribute to housing expenses. In the overall index, housing usually occupies 30.9%.
• Groceries: Grocery costs are a fundamental part of the cost-of-living index. This category includes not only food but essential household products and typically occupies 17.26% of the overall index.
• Transportation: Transportation costs include personal vehicles, commuting expenses, public transportation and even air travel. Transportation expenses account for approximately 7.54% of the overall index.
• Utilities: Utilities such as electricity, water, heating and internet services generally constitute around 10.21% of the overall index.
• Health care: Health care costs, including insurance premiums, medical services and prescription drugs, make up approximately 4.42% of the overall index.
• Miscellaneous: Miscellaneous expenses can include entertainment, clothing, personal care and other major discretionary spending. These account for about 29.67% of the overall index.

How To Calculate Cost Of Living

What Is Inflation And How Does It Impact Cost Of Living?

Inflation refers to the rate at which the general prices for goods and services rise. When there is inflation, a set amount of money buys less than it did previously. We often talk about inflation when we see gas and food prices unexpectedly going up, leading to people having to spend more money to maintain the same lifestyle. This directly affects the general cost of living and usually results in a reduced standard of living for those impacted.

FAQs: The Cost Of Living

Let’s now take a look at some frequently asked questions about the cost of living.

What are COLAs and how do they relate to cost of living?

Cost-of-living adjustments (COLAs) are increases in salaries or benefits connected to the cost-of-living index. These adjustments are designed to help maintain purchasing power as the cost of living rises, thus ensuring that the actual value of income remains relatively constant. Be aware that these are not offered at most jobs and often depend on employer discretion.

Do interest rates make a difference in cost of living?

Interest rates make a difference in the cost of living. When interest rates are low, it’s cheaper and therefore easier for people to borrow money. This can increase demand for goods and services, leading to higher prices and ultimately impacting the overall cost of living. However, when interest rates are high, borrowing becomes more expensive. There is usually a lower demand for goods, potentially decreasing prices and reducing the cost of living.

How accurate are cost of living indexes?

The Bottom Line