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stack of coins and house to represent cost of living

Understanding Cost of Living

Recently, there’s been a lot of talk about the cost of living, but there’s a huge mystery surrounding it. What is the cost of living and how is it calculated? These questions are pretty common, but it’s just the tip of the iceberg for understanding the cost of living. 

What is Cost of Living?

Many people talk about the cost of living, but the definition is sometimes misconstrued. Simply defined, the cost of living is the amount of money needed to sustain a certain standard of lifestyle, which includes basic expenses such as housing, food, taxes, and health care. The cost of living is often used to compare how expensive it is to live in one city versus another. For example, the cost of living is higher in New York than in Memphis.

The cost of living goes beyond salary because a smaller salary can go further in a city where it doesn’t cost a lot to get by, while a large salary can seem insufficient in an expensive city. Some cities with the lowest cost of living are Ardmore, OK, Fayetteville, AR, McAllen, TX, Memphis, TN, and Harlingen, TX. On the other hand, cities with the highest cost of living include New York City, San Jose, San Francisco, Washington D.C., Honolulu, Boston, Los Angeles, and San Diego.  

How is Cost of Living Calculated?

Measuring the cost of living can be calculated in very different ways. For example, you can compare one city to another, or you can compare entire states and countries to each other. The way you can calculate your cost of living is by adding your living expenses, housing, food, taxes, education and childcare, transportation, healthcare, and any other costs you have on a daily/monthly/yearly basis. 

What is the Cost of Living Index?

A cost of living index compares the cost of living in a major city as compared to a corresponding metropolitan area. The index incorporates the expense of various components that comprise basic human needs, creating an aggregate measure to which new workers looking for a job can use as a reference. It’s also a great way for a potential resident of a city to figure out what salary they’d need to live the same lifestyle they currently live. New York City is often used as a benchmark for other U.S. cities because of the high cost of living. 

The cost of living index is a theoretical price index, so potential residents need to remember that the cost of living could be higher and lower than imagined. The number is represented on a scale with 100 as the base. For example, if you compare Honolulu to New York City, Honolulu will start with a 100 base. New York City could then have a cost of living index of 120, meaning that it’s 20% more expensive to live in New York than Honolulu. Rent, food, and other necessities are expected to be 20% higher than the base city.  

Cost of Living and Wages

Cost of living is most commonly brought up with the discussion of raising the federal minimum wage. The debate over raising the U.S. federal minimum wage is deeply rooted in the disparity between the lowest wage allowed by law and the earnings needed to maintain an adequate cost of living. Rather than “cost of living,” it is most commonly referred to as a “living wage.” This is the amount of money needed to afford adequate shelter, food, and other necessities of life. 

Last Updated: February 23, 2017