What Is Cost of Living?

Definition & Examples of Cost of Living

A woman buys jewelry from a boutique in her new neighborhood.
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Cost of living is a measurement based on the amount of money you need to cover your everyday expenses like housing, health care, and food. Understanding cost of living can help you weigh the economic cost of moving to a new city or state.

What Is Cost of Living?

Cost of living is a way to measure how expensive it is to live in a particular place, whether it’s a country, state, or city. Cost-of-living calculations vary based on who is performing them, but in general, the most widely accepted cost-of-living measure is the consumer price index (CPI)—a metric published by the Bureau of Labor Statistics (BLS) that calculates the change in prices for consumer goods and services.

The CPI isn’t the only cost-of-living measurement. Any number of organizations or websites could create their own cost-of-living measurements that take various goods and services into account. And, there are plenty of cost-of-living calculators available online.

In the end, all measurements tend to answer one question: How much does it cost to live everyday life in one location at any given time? 

Cost of living is a helpful metric if you’re moving to another city or state and want to see how new everyday expenses will compare with your salary or wage. 

How Does Cost of Living Work?

Cost of living is calculated by taking the price of a portion of goods and services everyone needs, like food and housing. Along with that, your income and budget determine how much of these goods and services you can afford. A carton of eggs might only cost a dollar more in the next city over, but the pay might also be higher, which tempers the higher cost of goods.

You can calculate cost of living using online calculators that analyze these details. Usually, calculators help you see what the average price of regular expenses are where you live or are thinking about living. 

For instance, the average price of a gallon of milk in Raleigh, North Carolina, is $3.31, but that same gallon of milk will cost you $4.04 in Fort Lauderdale, Florida. Rent in Fort Lauderdale is almost 50% higher compared to Raleigh, too. So, if you’re offered a job with offices in Raleigh and Fort Lauderdale, you may choose to go to Raleigh because your dollars will go further there.

While calculators can be a great tool to understand cost of living in specific cities or states, CPI is a good way to gauge national cost-of-living trends. The BLS performs yearly surveys of consumers across the country to identify what residents spend in eight major groups of consumer categories: 

  • Food and beverages
  • Housing
  • Apparel
  • Transportation
  • Medical care 
  • Recreation
  • Education and communication
  • Other goods and services

In all, the CPI utilizes the prices of around 80,000 items each month to generate the price index, which gives an overview of how prices for everyday goods change over time.

The government uses cost-of-living data to determine how much to adjust Social Security benefits and retirement payments for military or Federal Civil Service retirees. Millions of individuals get a cost-of-living adjustment to benefits and pay.

How You Can Use Cost of Living

If you’ve ever explored moving to a new city or even the next neighborhood over, you might see a drastic difference in earnings and expenses compared to where you live now. 

That’s because cost of living determines the cost to live in a particular area based on:

  • Housing
  • Food
  • Transportation
  • Health care
  • Taxes
  • Child care
  • Education

If you’re considering retiring in another state (or even another country), compare the location’s cost of living to where you live now. See what a regular restaurant meal costs, or what you’ll pay, on average, for a one-bedroom apartment in the city and its surrounding area. Compare grocery prices, utilities, and child care, if it applies. Evaluating these factors will let you know how far your dollar will go in your new location, giving you an idea of how much more (or less) you’ll need to earn if you decide to move.

Key Takeaways

  • Cost of living is specific to where you live; the cost of living in Montana compared to California is vastly different.
  • Cost of living is determined by measurement indexes like the consumer price index.
  • Adjustments to cost of living impact not just goods and services, but also Social Security benefits and income for federal service workers.
  • If you’re thinking about moving, compare the new location’s cost of living to where you live now to see how much more or less you’ll pay.