Mar 25, 2024
It might seem to you that the cost of many items seems to keep going up, from milk and eggs to cars and rent. Depending on where you live, the financial pinch might be severe. In other places you may have seen some costs go down. But no matter where you call home, the cost of living continually changes and affects us all.
“It feels like our grocery bills are so different every week,” said Cristina Jannings, interviewee who lives with her husband near San Francisco. “We’re doing our best to cut back on some stuff. We’ve skipped a lot of concerts lately, and we try to walk as much as possible. This all helps, but with the cost of living bouncing, it makes sticking to a budget really difficult.”
Economists use what’s called “the cost of living” to help measure our standard of living. But how is the cost of living defined, how is it calculated, and how might that number impact your family’s budget or a potential move? Let’s take a closer look.
The cost of living refers to how much money it costs to maintain a typical standard of living at a certain point in time. Cost of living includes basic expenses like adequate housing, health care, transportation, and food. It’s one of the most important factors affecting your ability to build wealth. If your cost of living doesn’t leave you money to save or invest, it’s hard to plan for financial goals.
Strictly speaking, the cost of living measures how much the basics of life will cost: shelter, food, transportation, health care, etc. Your standard of living is measured by how much comfort you can afford in goods and services. How you view your standard of living can be more subjective. Obviously, there’s more to your life than just the basics. Even the type of basics you choose will vary in price. Your ability to spend on additional things will help determine your standard of living. For example, a higher standard of living might include greater spending on luxuries and vacations, as well as the ability to save more money each month. A lower standard of living might entail shopping at discount stores, limiting trips, and having little or no savings.
Knowing the standard of living you aspire to is important. Then, it is key to manage your budget in a way that allows you to achieve that lifestyle and save money. You’ll usually need to pay attention to both your cost of living and your desired standard of living to make the numbers work.
Your lifestyle choices may drive your standard of living or impact it. For example, some people may eat out daily, travel to luxury destinations, or dress in designer clothes. Others choose to make everything from scratch, borrow movies from the library, or take long walks in the woods for entertainment. Both can be viewed as a higher standard of living, if they are your choice and within your means. Even in the same location, people may make different financial choices based on their interests and priorities, leading them to have very different standards of living.
To determine the cost of living, economists tally up the prices for a sample of goods and services, like health care, food, and housing. These costs are based on what people actually spend, broken down by location.
To calculate your own cost of living, add up how much you spend on essentials. For many people, housing makes up the biggest share of their cost of living because it takes up such a big part of most people’s budgets. According to the Bureau of Labor Statistics, housing accounted for more than 33% of the typical American’s expenses in 2022.1
In addition to housing, the most common categories of expenses include:
Where you live can change the equation. The cost of living varies from state to state, region to region, and city to city.
For example, the state of Hawaii has the highest cost of living in the U.S., while Oklahoma has the lowest.2 Generally, states on the two coasts have a higher cost of living than states in the Midwest or South.
Of course, if you’re deciding whether to move to another state or city, though, the cost of living probably isn’t your only consideration. Your social life and future career opportunities are also important factors.
In some cases, you might be willing to accept a higher cost of living if it means landing your dream job or living close to family. If so, you will need to be proactive about managing your budget, and possibly adjust your money habits to continue hitting important financial milestones.
Cities with thriving urban centers and plentiful jobs tend to have higher costs of living than areas with declining populations and weak economies. For example, $100 would buy significantly more goods and services in a rural community in the South than it might in, say, Los Angeles or New York City.
Living in a location with a high cost of living means your dollars may not go as far. You might live in Little Rock, Arkansas, and earn a salary of $60,000. If you move to Palo Alto, California, you’d need to earn over 80% more to maintain the same standard of living. That’s almost twice the cost of living.
If you’re planning to move to another state or city, be sure to do some research. You might use an online cost of living calculator, like this one from Forbes, to compare the cost of living in your current city or town to your new location. This will give you an idea of how much you will need to earn to maintain the standard of living you are used to.
If you find that your new location might be financially difficult, consider the ways mentioned below to reduce your cost of living. It is also important to plan ahead if you think you might need help paying for moving expenses.
Prices continually change for everything, so your cost of living might fluctuate month to month or year to year. To understand how prices move up and down, the government publishes several indexes.
Among the most closely followed is the Bureau of Labor Statistics Consumer Price Index (CPI), which tracks how much the prices of goods and services have changed and is often used as a measure of inflation. An index is provided for the entire U.S., and for states and various cities.
It is important to understand that costs across the board do not rise equally. The CPI measures prices for the major groups of goods and services that consumers pay for, including food, housing, apparel, transportation, medical care, and education.3 Keep in mind that the CPI only measures the average change of prices over time, not day-to-day price fluctuations.
A cost of living index measures the amount that consumers need to spend to reach a certain standard of living . While the CPI tracks prices for goods and services, the government does not provide an official cost of living index.4 Some private organizations, however, calculate their own indexes, which might be helpful when comparing different locations.
While related, inflation and the cost of living are not the same. Inflation is the overall increase in the price of items. The cost of living is how much money is needed to pay for those items. During periods of high inflation expenses may rise faster than usual, pushing up the cost of living.
Although the government does not publish a cost of living index, the Social Security Administration does use economic data to try to ensure that retirees maintain their standards of living.4 Each year a cost of living adjustment (COLA) is made to reflect the impact of higher prices due to inflation. Employers often apply cost of living adjustments to set the amount of salary raises each year.
Knowing how to calculate and limit your personal cost of living could be key to reaching your financial goals. It might help you make smart decisions about where to live, what to spend your money on, and how to plan for the future.
“Trying to figure out how much things will cost each week is rough, and making ends meet is still a challenge,” Jannings said. “But we’re doing a pretty good job, and now we’re able to get back to building up our savings. Overall, things are beginning to look up.”
There are many ways to reduce your cost of living. Begin by understanding your budget. Then look for steps you might take to lower your expenses. These might include:
You might also take a look at payments you are making on any outstanding debt. You might consider consolidating higher-interest debts with a personal loan, which may help you save money on interest and add some breathing room to your budget. That way, you might be able to lower your cost of living and simplify your finances at the same time. If you choose this path, you can apply in minutes with Discover® Personal Loans .
Want to learn ways to budget your money better and manage your own cost of living, wherever you live?
Articles may contain information from third-parties. The inclusion of such information does not imply an affiliation with the bank or bank sponsorship, endorsement, or verification regarding the third party or information.
