Cost of Living: Definition, Index and Factors To Measure

Updated December 22, 2022

A person sits on the ground and looks thoughtfully at their laptop screen.

Calculating the cost of living is an important factor when searching for a new job or accepting a job offer. When completing either of these activities, consider using a living expenses calculator and a cost-of-living adjustment calculator to get a realistic estimate of how much living in the area in which the job is situated might cost. This can help you determine if your new wages are likely to cover your basic expenses, especially if you choose to relocate to a new location with a higher cost of living.

In this article, we define cost of living and describe the related index, explain cost-of-living adjustments, review the connection to Social Security benefits, describe how to calculate this metric, list necessary costs to consider and offer advice to help you plan for a move to a city with a high cost of living.

Key takeaways:

  • Cost of living is the amount of money you might pay to sustain a reasonable lifestyle in a particular city.

  • Cost-of-living adjustments (COLAs) refer to wage adjustments necessary in certain cities to match the amount a resident can earn with the cost of living.

  • Factors to consider when calculating cost of living include housing, food, clothing, education, health care, transportation, taxes and additional expenses.

Cost of living definition

Cost of living is the monetary amount you're likely 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

  • Taxes

After calculating the cost of living, you can compare two or more cities to find out how affordable or expensive it can be to live in those cities. When the cost of living is high, you may seek a job that gives you a high enough salary to meet your basic living expenses.

Related: How To Negotiate Salary After a Job Offer (With 13 Tips)

What is the cost of living index?

The cost of living index is a price index that considers and combines many living expenses to create an aggregate expense measure. Aggregate expenditure is a tool that can measure economic activity in a certain region. 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 might incur if you lived in either location. You can then use the information to decide if relocating for a new job is likely to be worth it, or if you might explore other alternatives.

Related: How To Find the Best Job for You in 6 Steps

Cost-of-living adjustments (COLAs)

As the cost of living rises, so may the wages in that area. These salary adjustments can help individuals in that area afford basic expenses and maintain a decent standard of living. To ensure that wages align with rising inflation and that Social Security and Supplemental Security Income (SSI) benefits remain useful, the United States Congress instituted the cost-of-living adjustments (COLAs) by legislation as part of the Social Security Amendments in 1972. From 1975 on, there has been an automatic COLA annually.

Read more: What Is Cost-of-Living Adjustment (COLA) and How Is It Used?

Social security benefits

The Social Security Administration (SSA) uses the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W) as a cost-of-living adjustment calculator. They then use what they find to adjust social security benefits. After 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 the percentage increase is the same as the previous year, the wage and social security benefits are both likely to stay the same.

In 2023, the benefits from Social Security and Supplemental Security Income (SSI) are likely to increase by 8.7%, according to the Social Security Administration. SSI beneficiaries began receiving payments on Dec. 30, 2021.

Related: What Is the Consumer Price Index (CPI)?

Calculating cost of living

To calculate the cost of living, consider:

  • The prices of necessities

  • Your overall budget

  • Your location

  • Your long-term plans

You can also consider your long-term plans when calculating and making decisions relating to the cost of living. For instance, you may include the cost of childcare if you plan to have children and the cost of buying a house if you plan on settling permanently in the new city or town. If you plan on staying in an expensive city for a set amount of time, you might also consider that as a factor.

Related: What Is an Average Cost of Living Raise? Definition and How To Calculate

What to consider when calculating cost of living

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 might factor in:


Whether you decide to rent or buy, housing can take up much of your income. Rental or mortgage prices can vary widely from city to city and neighborhood to neighborhood. According to many personal finance experts, it can be financially sound to spend less than 30 percent of your income on housing.

For example, someone with an income of $6,000 per month might try to find housing for under $1,800 per month. That includes rent or mortgage payments, maintenance and taxes. This practice can help you maintain a sustainable budget.

Related: Minimum Wage vs. Cost of Living: How Do They Compare?


The prices of food, including basic staples, vary from area to area. Here are some tips to consider when managing your food budget:

  • 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 limit the budget further by deciding to eat more vegetables and by being more conscious about not wasting food.


How much you pay for expenses like clothing depends on factors such as:

  • Type

  • Brand

  • Shop

  • Area

Other influencing factors in budgeting for clothes include:

  • Whether you're buying clothes for just yourself or your also dependents

  • If your work requires a certain style of dress

  • If the climate of the area to which you're moving requires you to purchase new clothing

Related: How To Calculate the Cost-to-Income Ratio in 5 Steps


Whether you're spending on education for yourself or your children, it can be a considerable expense in your budget. You might factor in educational expenses like:

  • Tuition

  • Workshops

  • Field trips

  • Textbooks

  • Computers

  • Software

It's also helpful to plan for educational loans you might need and include those in your long-term calculations.

Health care

The costs of health care and insurance vary by location. You can also consider whether you qualify for healthcare from your employer or if you plan to buy a health plan yourself. You may dedicate a certain amount of money per month to cover the costs of health care for you and your family. If you have pets, you may also budget for their veterinary care.

Related: What Is a Health Reimbursement Arrangement and How Does It Work?


If you have a car, factor in all the costs that come with it, such as:

  • Fuel

  • Parking

  • Tolls

  • Maintenance

  • Repairs

While commuting by public transport or carpooling can help cut costs, these options may not be available in all cities and towns. If you drive far to get to work or drive to various locations as part of your job, try to factor that into your expenses. Sometimes, your employer may compensate you for these expenses.


Some states don't have sales and income taxes, and in others, these taxes can be high. Federal income taxes can vary from 10% to 37%. Consider 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.

Related: Costs vs. Expenses: What Are the Differences?

Additional expenses

Along with the necessities, there are additional expenses for you to consider. These include:

  • Smartphones

  • Computers

  • Software programs

  • Internet subscription plans

  • Personal care items

  • Household items

There are also additional expenses that you might more easily reduce if you're on a budget, like entertainment, eating at a restaurant or going on a vacation.

Related: How To Disclose Salary Requirements

Planning for a new cost of living

If you're planning to move to a city with a higher cost of living, consider carefully whether your current financial situation can allow you to sustain your lifestyle in that new city. In some areas, you might live well on your current salary, while in others, you might benefit from a salary increase. If an increase is necessary, schedule a conversation with your manager to discuss the possibility. You might prepare for this meeting by collecting cost of living data to share.

You may also protect your finances by:

  • Reducing excess spending

  • Selecting another area with a lower cost of living

This article is for informational purposes only and does not constitute financial advice. Consult with a licensed financial professional for any issues you may be experiencing.


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