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What Is Cost of Living?

Definition & Examples of Cost of Living

DEFINITION:

Cost of living is a calculation based on the amount of money you need to meet your regular needs, such as housing, health care, and food. Understanding cost of living may help you assess the economic impact of migrating to a different city or state.
 
Cost-of-living calculations differ dependent on who is making them, but in general, the most frequently acknowledged cost-of-living indicator is the consumer price index (CPI)—a statistic issued by the Bureau of Labor Statistics (BLS) that estimates the change in prices for consumer goods and services.

The CPI isn’t the sole cost-of-living statistic. Any number of organizations or websites might construct their own cost-of-living metrics that take diverse commodities and services into consideration. And there are lots of cost-of-living calculators accessible online.

In the end, all metrics converge to answer one question: How much does it cost to live ordinary life in one area at any given time?
Note
Cost of living is a valuable indicator if you’re relocating to another city or state and want to understand how new daily expenditures will compare with your income or earnings.

How Does Cost of Living Work?

Cost of living is computed by taking the price of a part of products and services everyone needs, such as food and shelter. Along with that, your income and budget dictate how much of these items and services you can purchase. A carton of eggs may just cost a dollar more in the next city over, but the salary could also be greater, which tempers the increased cost of commodities.

You may determine cost of living utilizing online calculators that examine these facts. Usually, calculators assist you determine what the average price of everyday costs are where you live or are considering about living.

For instance, the average price of a gallon of milk in Raleigh, North Carolina, is $3.31, while the same gallon of milk would cost you $4.04 in Fort Lauderdale, Florida. Rent in Fort Lauderdale is roughly 50% more compared to Raleigh, too. So if you’re given a position with offices in Raleigh and Fort Lauderdale, you may opt to move to Raleigh since your dollars would go farther there.

While calculators may be a fantastic tool to understand cost of living in individual areas or regions, CPI is an excellent approach to measure national cost-of-living changes. The BLS runs annual surveys of consumers throughout the nation to discover what residents spend in eight broad groupings of consumer categories:
  • Food and drinks
  • Housing
  • Apparel Transportation
  • Medical care
  • Recreation
  • Education and communication
  • Other products and services
In total, the CPI uses the prices of about 80,000 products each month to construct the price index, which presents an overview of how prices for ordinary commodities vary over time.
Note
The government utilizes cost-of-living statistics to decide how much to alter Social Security benefits and retirement payments for military or Federal Civil Service retirees. Millions of people obtain a cost-of-living adjustment to benefits and salary.

How You Can Use Cost of Living

If you’ve ever considered relocating to a new city or simply the next neighborhood over, you could notice a huge change in wages and expenditures compared to where you reside currently. That’s because cost of living influences the cost to live in a certain place depending on:
  • Housing
  • Food Transportation
  • Health care Taxes
  • Child care Education
If you’re contemplating retiring in another state (or perhaps another country), compare the location’s cost of living to where you live now. See what a standard restaurant meal costs, or what you’ll spend, on average, for a one-bedroom apartment in the city and its surrounding region. Compare food costs, utilities, and child care, if it applies. Evaluating these elements can allow you know how far your dollar will go in your new area, giving you an estimate of how much more (or less) you’ll need to earn if you decide to relocate.

Key Takeaways
 
Cost of living is particular to where you reside; for example, the cost of living in Montana compared to California is substantially different.
 
Cost of living is calculated by measuring indexes like the Consumer Price Index.
 
Adjustments to cost of living effect not only products and services, but Social Security benefits and pay for government service workers.
 
If you’re thinking about relocating, compare the new location’s cost of living to where you live currently to determine how much more or less you’ll spend.

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