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Cost of Living

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Cost of Living

Food is a large component of the cost of living.

Photo: Elly Lange / Getty Images

What Is the Cost of Living?:

The cost of living is how much you pay for housing, gas, food, clothing, and other everyday items. It is a useful measurement that allows you to compare expenses between locations and over time. There are many sources that estimate the cost of living for you. It's important to keep in mind that it's a index, so you're particular expenses might be higher or lower. For example, gas expense would cost more if you have a Hummer vs a Prius. However, these cost of living estimates are useful tools for comparison.

How the Cost of Living Is Calculated:

The cost of living between areas is calculated by finding prices for a representative sample of goods and services. It then takes into account how much of a person's budget would be consumed by the item in a year. For example, one gallon of milk might not cost much compared to a dress, but over a year, it would cost much more. Therefore, the price for each item is weighted to account for its importance to a typical family's budget.

One example is the widely-used Council for Economic Research Cost of Living Index (COLI). It ivides all goods and services into six categories. It then picks 60 items that are representative of the most important sub-categories. It takes a snapshot of those prices to build the index. For more, see COLI.

A more thorough example is the Federal government's official measurement of inflation, the Consumer Price Index (CPI). The Labor Department measures prices of 80,000 goods and services from 23,000 retail and service businesses. The BLS weights the items according to how they are used by a sample of 14,500 families. The CPI excludes income taxes, but does include sales taxes.

Cost of Living Comparison:

Most cost-of-living calculators give you a direct dollar-for-dollar comparison between you location and another. You plug in your salary, and they tell you what you would need to earn to have the same standard of living in the new location. Many also tell you what it costs for various categories, such as housing, various food items, and gas. Keep in mind these are estimates based on samples, so your cost of living may be significantly different.

Cost of Living Index:

The cost-of-living index gives you the percentage difference in the cost of living between your location and another. It's particularly useful to compare international locations because it compensates for exchange rate differences. Since it's an index, the cost of living in your area is always 100. If the place you're comparing it to is greater than 100, it's more expensive to live there. If it's less than 100, it's cheaper. The difference is the percent more or less it will cost you. For example, if it's 120, then its 20% more expensive.

Cost of Living Calculator U.S.:

Here are some of the more accurate calculators for the U.S.:
  • COLI - Available for a small fee.
  • Bankrate - Based on COLI. Breaks out specific items like housing, doctors' visits, and dry cleaning.
  • Nerdwallet - Also based on COLI. It also has a City Life comparison of other quality-of-life indicators.
  • Money CNN - Breaks out relative costs by categories.
  • Consumer Price Index - Compare the cost of living between any time periods, between 5 major U.S. cities, and four regions.
In addition, the U.S. Department of State offers links to a variety of resources to help you determine the best place for you to live. See Salaries, Costs of Living, & Relocation.

Cost of Living Calculator International:

The Economist Intelligence Unit provides a cost of living calculator between cities around the world. It takes into account the relative cost of most goods and services. For more on how it's calculated, see How the Index Is Calculated. To use the calculator, go to Worldwide Cost of Living Calculator. However, it does cost a fee.

However, just looking at the cost of living doesn't tell you how easy it is to live in the city. Many factors, such as pollution or crime, don't necessarily create an immediate cost, but could make the city harder to live in. Therefore, the EIU also provides a Global Liveability Report.

The EIU's index is most thoroughly researched, but expensive. For quick, less expansive but less accurate comparisons, see these sites:

  • Expatistan - quick comparison between cities, but data is submitted by visitors so could therefore be suspect.
  • Numbeo - Also volunteer data-source. Provides more info on quality of life. Must register to use.
  • U.S. State Department - Provides a quick calculator for per diem rates in cities throughout the world. Gives you a good comparison of relative costs in dollars.

Highest Cost of Living:

The top ten most expensive cities in the world are, (starting with the highest cost):
  1. Tokyo, Japan
  2. Luanda, Angola
  3. Osaka, Japan
  4. Moscow, Russia
  5. Geneva, Switzerland
  6. Singapore
  7. Zurich, Switzerland
  8. Ndjamena, Chad
  9. Hong Kong
  10. Nagoya, Japan
(Source: Mercer 2012 Cost of Living Rankings)

Lowest Cost of Living:

The ten least expensive cities in the world are (starting with the lowest cost:
  1. Karachi, Pakistan
  2. Mumbai, India
  3. Tehran, Iran
  4. New Delhi, India
  5. Jeddah, Saudi Arabia
  6. Katmandu, Nepal
  7. Panama City, Panama
  8. Algiers, Algeria
  9. Dhaka, Bangladesh
  10. Muscat, Oman
(Source: Economist Intelligence Unit, 10 Cheapest Cities in the World 2012)

Cost of Living Adjustment:

The Cost of Living Adjustment, or COLA, is the adjustment made to make wages or benefits stay current with the cost of living. It's most widely used for retirees and recipients of Social Security benefits, but can also be applied to government workers, union negotiations and contracts for valued employees. It's used to ensure that income keeps up with inflation. Employers also use it when employees are asked to relocate to a more expensive location. For more, see Cost of Living Adjustment.

What Is the Cost of Living Increase?:

The cost of living increase is a measurement of how the cost of living changes over time, also known as inflation. If the cost of living decreases, that's known as deflation. The best measurement of the cost of living increase is the CPI. Here's a calculator to give you the cost of living increase over any period of time. CPI Calculator. Article updated January 25, 2013

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