Cost of Living Definition and Factors to Measure

By Indeed Editorial Team

January 26, 2022

Calculating the cost of living is an important factor when searching for a new job. When searching for new jobs or deciding whether to accept a job offer, you must determine if your wages will be sufficient to cover your basic expenses, especially if you choose to relocate to a new location with a higher cost of living. Using a living expenses calculator and a cost of living adjustment calculator, you can get a realistic estimate of the cost of living.

In this article, we will examine the cost of living and cost of living index and how to calculate it.

What is cost of living?

Cost of living is the monetary amount you will need to pay for basic expenses and to maintain a certain lifestyle standard in the city of your choice. Your basic expenses can include rent or mortgage payments, food, clothing, educational expenses, health care, transportation and taxes. By calculating the cost of living, you can make comparisons between two or more cities to find out how affordable or expensive it can be to live in them. To live in cities where the cost of living is high, you will need to earn a high enough salary to meet your basic living expenses.

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What is the cost of living index?

The cost of living index is a price index that considers and combines many different living expenses to create an aggregate expense measure. You can use this measure as a standard for making comparisons. Using the cost of living index as a representative sample, you can compare the cost differences of living between cities and metropolitan areas. It can help you gauge the expenses you would incur if you lived in either location. You can then use the information to decide if relocating for a new job will be worth it or if you should explore other alternatives.

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What are cost of living adjustments?

As the cost of living rises, there has to be a corresponding hike in wages or the cost of living salary adjustment if you are to meet your basic expenses and maintain a decent standard of living.

To ensure that wages kept in pace with the rising inflation and the inflation didn't erode Social Security and Supplemental Security Income (SSI) benefits, the U.S. Congress instituted the cost of living adjustments (COLAs) by legislation as part of the Social Security Amendments in 1972. From 1975 onwards, there has been an automatic COLA annually.

The Social Security Administration (SSA) makes use of the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W) as a cost of living adjustment calculator. The U.S. Bureau of Labor Statistics determines the CPI-W. The SSA measures the percentage increase in the CPI-W from the third quarter of a COLA-determined year to the current year's third quarter. If there has been no percentage increase in this duration, the COLAs won't take place.

In 2022, the benefits from Social Security and Supplemental Security Income (SSI) are going to increase by 5.9%. SSI beneficiaries began receiving their payments Dec. 30, 2021.

How to calculate cost of living

To calculate the cost of living, you will need to consider the prices of necessities and how much of your budget you will need to spend on them. There will be a different cost of living in different cities, and the factors you take into account for comparison will depend on your circumstances and long-term plans. For instance, you will have to include the cost of childcare if you have children and the cost of buying a house if you plan on settling permanently in the new city or town.

You can use a living expenses calculator to estimate what your cost of living budget is likely to be if you move to a different city or town. Here are some expenses you would have to factor in:

  • Housing

  • Food

  • Clothing

  • Education

  • Health care

  • Transportation

  • Taxes

  • Additional Expense


Rental or mortgage prices can vary widely from city to city and neighborhood to neighborhood. Whether you decide to rent or buy, housing can take up a large portion of your income. According to many personal finance experts, you shouldn't spend more than 30 percent of your income on housing. So, if you earn $6,000 per month, your housing expenses shouldn't exceed $1,800. That includes rent or mortgage payments, maintenance and taxes. If it does, it will be difficult for you to maintain a sustainable budget.


The prices of food, including basic staples, vary from area to area. That will affect your budget, as will your choice to cook or eat out. Cooking all your meals at home can save you a lot of money, and more so if the city you live in or are planning to move to doesn't impose any sales tax on groceries. You can trim the budget further by deciding to eat more vegetables and by being more conscious about not wasting food.


How much you pay for need-based expenses like clothing depends on factors such as type, brand, shop and area. Other influencing factors in budgeting for clothes include whether you are buying clothes for just yourself or your dependents as well, if you are required to dress up for work and if you must purchase clothing based on the climate of the area you are moving to.


Whether you are spending on education for yourself or your children, it can be a considerable expense in your budget. Along with any educational loans you might need, you must also factor in prices for tuition, workshops, field trips, textbooks, computers and software.

Health care

The costs of health care and insurance will vary by location and whether you can get employer-sponsored health care or you must buy a health plan yourself. You may need to set aside a certain amount of money per month to cover the costs of health care for you and your family. If you have pets, you will also have to budget for their veterinary care.


If you have your own car, you will have to factor in all the costs that come with it, such as fuel, parking, tolls, maintenance and repairs. While commuting by public transport or carpool can help cut costs, these options may not be available in all cities and towns. If you have to drive far to get to work or drive to various locations as part of your job, you will have to factor that into your expenses as well. In some cases, your employer may compensate you for these expenses.


Some states don't have sales and income taxes, while these taxes can be very high in others. Federal income taxes can vary from 10 percent to 37 percent. You must factor all of this in your cost of living comparisons. Depending on where you choose to live and work, taxation can have a drastic effect on your budget. It might help to consult a personal finance expert to find out how much you can save on taxes to improve your cost of living.

Additional expenses

Along with the basic necessities, there are additional expenses that you generally cannot avoid, such as smartphones, computers, software programs, Internet subscription plans, personal care items and household items. Several other expenses like entertainment, eating out or going on a vacation are not essential, and you may want to consider cutting them out if you are on a tight budget.

Overall, it can be difficult to pare down the necessary expenses beyond the minimal. Fortunately, you have the option to move to other areas with better costs of living. You should research these places in depth and estimate exactly how much you must earn to maintain your regular living standard if you were to relocate. In some areas, you might be able to live well on your current salary, while in others you would require a salary increase. Whatever the case, knowing what to expect can help you to prepare well in advance.

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