Source: Bankrate —
The cost of living is the total amount of money required to live in a certain area and cover your basic necessities. Expenses typically factored into cost of living calculations include housing, food and taxes. It may also include such expenses as transportation, health care, entertainment and education.
Cost of living calculators are useful in comparing the expenses associated with different cities or regions. Expenses can vary dramatically from place to place, especially as inflation continues to impact the economy and housing market. Bankrate’s cost of living calculator can help you understand the disparities between two metro areas. The information can also be used to help you determine or negotiate the salary you’ll need in order to cover your basic needs in a particular city.
Necessary vs discretionary spending
Necessary spending is the money used to cover basic or essential needs, such as housing and food. Necessary expenses are living costs that cannot be avoided. The term discretionary spending, on the other hand, is used to describe non-essential costs. These might include recreation, entertainment or other items consumers purchase when they have money leftover after necessary expenses are covered. Discretionary spending could also include luxury goods and travel. Discretionary spending is influenced not only by how much disposable income one has remaining after paying for essential expenses, but also by the overall economic climate. People generally feel more comfortable spending on non-essential items when broader economic conditions are positive.
Cost of living index
A cost of living index is a city-to-city comparison of the cost of living in each place, based on a variety of consumer expenses and spending categories. Typically, the index is based on expenses such as food, housing, utilities, transportation, health care and other goods. For most cost of living indexes, the number 100 is used to represent the national average cost of living. Each city or region is given a number that’s either above or below 100, which is a barometer that consumers can use to gauge how the cost of living in a particular city relates to the national average. There are various cost of living indexes available online including:
- The Council for Community and Economic Research (C2ER) Cost of Living Index
- Economic Policy Institute (EPI) Family Budget Calculator
- Missouri Economic Research and Information Center (MERIC) Cost of Living Index
In addition, the U.S. Bureau of Labor Statistics publishes the widely referenced Consumer Price Index, or CPI. This index measures changes in prices for goods and services purchased by urban households. It also includes such consumer expenses as water and sewer service fees and sales and excise taxes. The CPI does not, however, include costs associated with income taxes or money consumers spend on investments like stocks, bonds or life insurance.
Cost of living calculations are based on various key necessities and expenses. These include: