Cost of Living, How to Calculate, Compare, and Rank

How to Compare the Cost of Living Around the World

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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.

Many sources estimate the cost of living for you. It's important to keep in mind that it's an index, so your specific expenses might be higher or lower. For example, gas would cost more if you have a Hummer than it would if you have a Prius. But these cost-of-living estimates are useful tools for comparison.

How It's Calculated

Agencies calculate the cost of living by finding prices for a representative sample of goods and services. They then take 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 one dress. But over a year, food would cost more than clothing. So the price for each item is weighted to account for its importance to a typical family's budget.

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

Cost-of-Living Comparison

Most cost-of-living calculators give you a direct dollar-for-dollar comparison between your location and another. You plug in your salary, and it tells you what you would need to earn to have the same standard of living in the new location. Many also say what it costs for various categories, such as housing, food, and gas. Keep in mind these are estimates based on samples, so your particular 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 it's 20 percent more expensive.

U.S. Cost-of-Living Calculators

Here are some of the most accurate calculators for the United States:

  • Bankrate - Breaks out specific items like housing, doctors' visits, and dry cleaning.
  • Money CNN - Breaks out relative costs by categories.
  • Consumer Price Index - Compares the cost of living between any time period and between five major U.S. cities and four regions.

The U.S. Department of State also offers links to a variety of resources to help you determine the best place for you to live. You may find these on its webpage, “Salaries, Costs of Living, & Relocation."

Cost-of-Living Calculator International

The Economist Intelligence Unit provides a cost-of-living survey comparing cities around the world. It takes into account the relative cost of most goods and services.

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 expense. They could make the city harder to enjoy. The EIU also provides a Global Liveability Report.

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

  • Expatistan - Quick comparison between cities. Data is submitted by visitors so the prices could be suspect.
  • Numbeo - Also a 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

Mercer 2018 Cost of Living Rankings provides information on the cost of living around the world. According to the site, these are the top 10 most expensive cities in the world for expatriates. The most expensive city is listed first.

  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 10 least expensive cities in the world are often in unsafe or war-torn areas. The lowest-cost city is first on the list.

  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 (Source: Mercer 2018 Cost of Living Rankings)

Cost-of-Living Adjustment

The cost-of-living adjustment is the change made to make wages or benefits stay current with the cost of living. The government uses it for retirees and recipients of Social Security benefits. On October 11, 2018, the Social Security Administration announced a 2.8 percent benefit increase for 2019. Retirees will see the increase in January 2019, which pays for the December 2018 benefits. 

Other applications include government workers' benefits, union negotiations, and corporate 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.

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. The CPI calculator gives you the cost-of-living increase over any period.