When you get paid every month, you set aside parts of your paycheck to cover major living expenses like; housing, utilities, food, transportation, and healthcare. Together, these necessities are considered “the cost of living.”
What is the cost of living?
Cost of living refers to the cost of the essential goods and services that are necessary to maintain your lifestyle.
Although the cost of living categories are relatively universal, the actual costs can vary widely from person to person. Differences in lifestyle, family size, consumption, and where you live can lead to wide differences in cost.
The Cost of Living Index
The cost of living index refers to differences in cost based on where you live. Data scientists, like those at Numbeo, determine the index by studying the purchasing power of money in certain locations.
They look at consumer goods prices, including groceries, restaurants, transportation, and utilities. Then they compare data from different locations to New York City, which was given a baseline index of 100.
In this method, New York City is used as a baseline. For example, if a city has a cost of living index of 125, it means it is 25% more expensive than New York City. If it has an index of 60, it is 40% less expensive than New York City.
Numbeo calculates two variations, one with rent and the other without.
The cost of housing, transportation, and food can vary widely depending on your lifestyle needs. What is essential to one person may not be to another.
Housing size and amenities can dramatically change the cost of housing. Likewise, caloric needs and dietary preferences can alter food costs.
When comparing the cost of living in different places, you should consider what your own baseline is based on your non-negotiable needs.
Cost of living and inflation are related ideas, but they are not exactly the same thing. Inflation measures the increase in the price of goods and services due to changes in markets like supply and demand. It is measured by changes in the Consumer Price Index as tracked by the Bureau of Labor Statistics (BLS). On the other hand, the index compares what things cost in different places and is affected by changes in inflation.
The Poverty Line
The cost of living compares minimum income needs in various locations and can be used as a tool to help determine the poverty line in a certain area.
For Federal assistance programs to be effective in helping participants afford basic necessities purchasing regardless of where they live, it is necessary to account for cost-of-living differences.
As inflation has pushed living costs up, there is an ongoing conversation about the U.S. federal minimum wage and its inability to keep up with the living costs.
In 1973, Congress enacted legislation to address cost-of-living adjustments (COLAs). It made adjustments, including Social Security and Supplemental Security Income (SSI) which include provisions that help benefits keep pace with inflation.
Compare Your Cost of Living to Other Countries
The cost of living varies widely from country to country. If you are curious how your area compares to other countries, check out our in-depth comparison, which looks at 138 countries worldwide.