Understanding the Cost of Living

Understanding the Cost of Living

The cost of living in various locations around the country is something that’s on a lot of people’s minds. Inflation is taking a chunk out of income for many people and forcing them to rethink their lifestyles in different ways.

So what exactly is included in the cost of living? There are a lot of factors, and when comparing different locations, while some things may be more expensive, if the average of these expenses is less in one area than another, then it’s going to be considered a lower cost of living location.

South Carolina is an example of a state with a low cost of living overall. Everything, including housing, food, and even things like car insurance, tend to be lower than in a lot of other states. As one example, car insurance in South Carolina, on average, costs $1,210 a year, and the national average is $1,311 a year. Car insurance would be included in the transportation category when calculating the cost of living.

Below we talk more about what’s meant by the cost of living and the specific factors it includes.

What Is the Cost of Living?

The cost of living is how much money that a person or family would need to cover what is considered basic expenses in a particular place and time period. The cost of living is used as a comparison to look at how expensive it is to live in one city or a state versus another.

The cost of living is associated with wages. If a city like New York,as an example, is one where the expenses are high, then the salary levels have to,at least in theory, be higher, so people are able to afford to live in the city.

In 2022, the overall cost of living has gone up dramatically compared to recent years. Essentials like gas and food have gone up significantly in price, so to maintain the same standard of living as in previous years, people have to spend more.

According to the U.S. Bureau of Labor Statistics, between April 2021 and April 2022, food costs rose by 10.8%. That’s the biggest rise since 1980. Gas prices have been reaching record highs, and rent has also gone up by record amounts. Rent is one of the biggest parts of many people’s cost of living.

A lot of factors are influencing the increasing costs, like supply chain issues from the pandemic, as well as the Ukraine-Russia war.

Calculating Cost of Living

The cost of living is calculated through a comparison of prices of a set of goods and services where consumers are spending money. Costs are divided into categories such as food, health care, and housing. The costs are weighted based on patterns of spending and peoples’ individual budgets.

Prices are collected by location, allowing people to determine one area’s cost of living in comparison to another.

Housing makes up the biggest share when calculating the cost of living because it makes up the largest portion of the budgets of most Americans. Around 30% of Americans’ budgets went toward housing in 2020, according to data from the Bureau of Labor Statistics. Transportation, which is the second-largest category, is less than half that coming in at 14% most recently.

The consumer price index (CPI) is one specific way to measure the cost of living. This calculates the changes in prices for goods and services consumers buy. There are other measures as well, though. The CPI looks at the prices of tens of thousands of items each month in the generation of a price index, giving an overview of how everyday goods prices change over time.

Using Cost of Living

If you’re considering moving to a different city or state, or even just to another neighborhood, you might use the cost of living comparisons. When you make these comparisons, you’re able to see how far your money might go in your new location and how much more you’d need to earn to keep up if you did decide to move.

There are online calculators you can use, where you enter your current city and where you’re thinking of moving, plus your income. Then, the calculator will show you how much you’d need to make in a new city if you wanted to maintain whatever your current standard of living is.

Cost of Living Adjustments

There’s another term you’ll hear talked about, which is a cost-of-living adjustment. As the cost of living changes, then benefits and wages have to change so the same standard of living can be maintained. The Social Security Administration will sometimes adjust benefits to stay in line with increases in the cost of living. This is known as the cost-of-living adjustment or COLA, assessed annually.

There will likely be a record-breaking cost of living adjustment for next year because of inflation.

How Can You Keep Up With Increases in the Cost of Living?

As inflation erodes purchase power and goods go up in price, the cost of living almost always increases.

If you’re worried about keeping up, one of the first things you can do is try to earn more income. If you get a 5% raise and the cost of living goes up 5%, you’re maintaining pace with the cost of living, so you should be able to keep your same standard of living.

If you can’t increase your earnings, then you’ll have to change something somewhere else. You may have to change your budget or find ways to save on recurring expenses like gas or car insurance. Discretionary expenses like vacations may be one of the first things to go in times when the cost of living is quickly increasing.

As more people can work remotely since the pandemic, another option has been to move somewhere with a lower cost of living but then maintain the same salary. This is allowing people to increasingly keep their current standard of living or even improve it.

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Christophe Rude

Christophe Rude

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