How to calculate your cost of living

How to calculate your cost of living

How to calculate your cost of living

The cost of living is essentially how much you would be paying for housing, food, clothing and other items that you purchase and use on an everyday basis. It’s a measurement used throughout our lives to compare expenses between places and locations that we visit, as well as how much money we spend over time.

There are many different sources on the Internet to assist with the calculation of your cost of living, however it is important to understand that your expenses might be higher or lower since it’s just an index. However, these estimates can be a very useful tool for comparison.

Let’s say for example that you have just moved to a new city; it can be extremely exciting, and change is always good especially if it is your dream location. However, a change in your living location can also come with an increase in cost of living.

Essentials such as food, electricity and other expenses like parking and public transport can vary drastically depending on where you live.


How is cost of living calculated?

How is cost of living calculated?

Various agencies calculate the cost of living by finding the correct prices for a variety of goods and services. They would then consider how much of a person’s budget would be used by those items over the period of a year. For example, two litres of milk will never cost much compared to an item of clothing.

However, over the space of one-year food would cost way more than clothing. So, the price for each item would need to be considered and weighted for its importance relative to a typical family’s budget.

Most of the cost of living calculators out there will give you a direct dollar-for-dollar comparison between your location and another. You basically input your salary and it does the magic by telling you how much you would need to earn to have the same standard of living in a new location.

Many calculators consider the cost of various categories, such as housing, food, essentials and gas. However, these estimates are based off samples, so your average cost of living may be significantly different.

If you are considering moving to an international location, or you would like to calculate the difference in exchange rates or the different percentages in the cost of living between your location and an international one, you would use the cost of living index. The cost of living index is particularly useful as it’s simple to understand the percentage of cost of living in your area – it will always be 100.

If the place you are considering is greater than 100, then it would be more expensive to live there. If it’s less than 100 it would be cheaper. The difference is expressed as a percentage.  For example, let’s say the new location is 120, then it would be 20 percent more expensive to live there.

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Cost of living calculators

Cost of living calculators

Some of the most accurate cost of living calculators are done within the United States, some of these calculators include:

  • Bankrate – using specific items such as housing, doctor’s visits and dry cleaning.
  • CNN Money – relative costs by category.
  • Consumer Price Index – compares the cost of living between any time period and any major U.S city or region.

International calculations

For international calculations, the economist Intelligence unit provides a cost-of-living survey that compares cities around the world. It uses the costs of most goods and services to consider the cost of living on an international scale. However, just by looking at the cost of living between different international cities won’t exactly tell you how easy it is to live there.

Many different factors such as pollution and crime don’t create an immediate expense but would make the city more difficult to enjoy. Which is why the EIU also considers and provides a global liveability index. Usually, the cost of some of these reports can be expensive due to the thorough research involved however, for a less costly comparison look at some of these sites:

  • Expatistan – a quick and easy comparison between cities, the data is submitted by visitors so the prices could vary.
  • Numbeo – another volunteer data-source provides information on the quality of life. You will need to be registered.
  • S State Department – provides a quick and easy to use calculator for per diem rates in multiple different cities around the world. It gives a very good and accurate comparison of the relative cost in dollars on an international scale.

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What goes into a cost of living index?

What goes into a cost of living index?

Consumer goods and services may vary in cost between different urban and suburban residential areas. A person’s salary in one area might provide a high standard of living if that area is in a small-scale city, where rent and utilities might be cheaper compared to a larger city such as New York or Los Angeles.

Another interesting way you can determine what the cost of living index represents is by asking yourself, “how many goods and services does a given sum of money purchase in a certain location?”. $100 might be enough for you living in a smaller scale city whereas in a larger one the price of goods and services might be a lot higher.

The change in cost of living can drastically impact a person’s choice of career and required salary, as well as where to live. It can also directly impact a person’s ability to save for a home, pay off debts, make the decision to start a family or decide on the correct time to retire. Expenses purchased on a need basis such as housing, clothing, healthcare, food and electricity can drastically increase over time and comprise a greater share of a person’s monthly income.

This is where a cost of living index comes in, it can be used to track the changes in basic expenses so a person can visually see how much the cost is increasing, while showing you how much-needed basic expenses vary from one city to another. The index is also extremely useful for determining whether the income or salary that is being earned is enough to have left-over income to use for retirement or to pay off debt.


Key points of a cost of living index

As said before, the cost of living index uses different variables and metrics which are determined as your base cost of living being 100 in terms of percentage. It’s important to consider the average income for geographic area’s as well. A town in the south might have a lower cost of living than some other towns on the coast. However, the southern town’s median income might be below the cost of living for that specific area.

  • Cost of living indexes are meant to compare the expenses from one town or geographic region to another.
  • Cost of living indexes include expenses such as food, shelter, transportation, energy, clothing, healthcare and childcare.
  • A cost of living index is also used to track how much the costs of basic expenses rise over a given period.


Examples of indexes

Economic Policy Institute

Economic Policy Institute

The Economic Policy Institute provides families with an updated cost of living data calculation for various cities and locations throughout the U.S. They also provide a family budget calculator for those who are considering moving or are interested in a specific region of the country.

The calculator helps families measure the difference in the cost of living for various geographic locations. Also, a variety of expenses are factored into the calculation, such as, food housing, childcare, transportation and healthcare.

Other examples of Cost of living indexes are as follows:

  • ACCRA COLA which compare the living expenses for various regions of the country. The Index features how much consumers spend on various items including, housing, utilities, groceries, healthcare and transportation.
  • Social Security Administrations COLA which is produced each year specifically for retirees receiving social security benefits. The adjustments are based on the rate of inflation which represents the rise of prices in the economy. For example, if a retiree earns $20 000 per year and inflation rises by 3% per year, the income has less purchasing power due to the rising prices. A rise of 2 or 3 percent inflation rate might not appear to be a large increase in costs, however, over a five to ten-year period, the percentages can add up to a substantial reduction in income, realistically or factoring in inflation.


Cost of living ratings from around the world

Cost of living ratings from around the world

Highest cost of living

Information provided by Mercer’s 2018 rankings displays the cost of living around the world. These are some of the world’s top 10 most expensive cities, from a 1 to 10 rating. The most expensive cities regarding to the cost of living are as follows:

  1. Hong Kong, HKSAR
  2. Tokyo, Japan
  3. Zurich, Switzerland
  4. Singapore
  5. Seoul, South Korea
  6. Luanda, Angola
  7. Shanghai, China
  8. N’Djamena, Chad
  9. Beijing, China
  10. Bern, Switzerland

Lowest cost of living

The top 10 least expensive cities in the world are usually in unsafe war-torn countries. These are some of the world’s lowest-cost cities rating from 1 to 10:

  1. Tashkent, Uzbekistan
  2. Tunis, Tunisia
  3. Bishkek, Kyrgyzstan
  4. Banjul, Gambia
  5. Karachi, Pakistan
  6. Blantyre, Malawi
  7. Tbilisi, Georgia
  8. Minsk, Belarus
  9. Tegucigalpa, Honduras
  10. Managua, Nicaragua


Cost of living adjustment

The changes that are made to assist in making wages or benefits stay current with the cost of living, is known as the cost-of-living adjustment. This index is used by governments around the world for retirees and recipients of social security benefits. Other applications include government worker’s benefits, union negotiations, and important corporate contracts for valued employees.

This calculation is used to ensure that income keeps up as much as possible with inflation. It can also be used if employers are required to relocate their employees to somewhere more expensive.


Cost of living adjustment

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Cost of living increase

The cost of living increase is a measurement of how the cost of living changes over time; it is also known as inflation. If the cost of living decreases, that’s known as deflation. The best measurement of cost-of-living increases is the CPI, which also has its own calculator that you can use here. The CPI calculator gives you an accurate representation of the cost-of-living increase over any period.

Limitations of using CPI as a cost of living Index

The limitations produced from using CPI as a cost of living index is that because it’s not intended to measure the actual cost of living in any given area or region, it becomes an increasingly limited measurement.

A typical cost of living indicator would help you measure changes in costs over time that are required to maintain a specific standard of living. It would also factor the changes in consumer buying that are deep rooted in economic conditions, adjustments in spending and some of the habits that people make, such as using alternative products when a product becomes increasingly expensive.

The process of changing expenditures is usually referred to as substitution, which means that the cost of maintaining a certain standard of living is usually less than the pure calculation of increased prices, since consumers can mitigate price increases by using a less expensive substitute.


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