What Is the Cost of Living?

During some periods, the cost of items may keep going up, whether it’s for eggs, milk, cars, or rent. Depending on where you live, the impact might feel severe. At other times you may see some costs go down. No matter where you call home, the cost of living continually changes and affects us all.

“It feels like our grocery bills are so different every week,” said Cristina Jannings, an interviewee who lives with her husband near San Francisco. “We’re doing our best to cut back on some stuff. We’ve skipped eating out, and we try to walk as much as possible. This all helps, but with the cost of living bouncing, it makes sticking to a budget really difficult.”

Economists use what’s called the “cost of living” to help measure a standard of living. But how is the cost of living defined, how is it calculated, and how might that number affect your family’s budget? Let’s take a closer look.

Table of contents

• What does the cost of living include? 
• How does the cost of living compare with the standard of living?
• How is the cost of living calculated?
• How does the cost of living vary by location? 
• Why does the cost of living change?
• What is the cost of living index?
• How can you manage your own cost of living? 
• What are ways to reduce your cost of living?

What does the cost of living include?

The cost of living includes basic expenses, like adequate housing, healthcare, transportation, and food. It’s one of the most important factors affecting your ability to build wealth. If your cost of living doesn’t leave you money to save or invest, it’s hard to plan for financial goals.

How does the cost of living compare with the standard of living?

The cost of living measures how much the basics of life will cost: shelter, food, transportation, healthcare, etc. Your standard of living is measured by how much comfort you can afford in goods and services.

How you view your standard of living can be more subjective. There’s more to your life than just the basics. Even the type of basics you choose may vary in price. Your ability to spend on additional things will help determine your standard of living. For example, a higher standard of living might include more spending on luxuries and vacations, as well as the ability to save more money each month. A lower standard of living might entail shopping at discount stores, limiting trips, and having little or no savings.

The impact of lifestyle choices

Knowing the standard of living you aspire to is important. Then, it is key to manage your budget in a way that allows you to achieve that lifestyle and save money. You’ll usually need to pay attention to both your cost of living and your desired standard of living to make the numbers work.

Your lifestyle choices may drive your standard of living or affect it. For example, some people may eat out daily, travel to luxury destinations, or dress in designer clothes. Others choose to make everything from scratch, borrow movies from the library, or take long walks in the woods for entertainment. Both can be viewed as a high standard of living if they are your choice and within your means. Even in the same location, people may make different financial choices based on their interests and priorities, leading them to have very different standards of living.

How is the cost of living calculated?

To determine the cost of living, economists add up the prices for a sample of goods and services, like healthcare, food, and housing. These costs are based on what people actually spend, broken down by location.

How to determine your own cost of living

To calculate your own cost of living, add up how much you spend on essentials. For many people, housing makes up the biggest share of their cost of living. According to the Bureau of Labor Statistics, housing accounted for nearly 33% of the typical American’s expenses in 2023.¹

In addition to housing, there are five common categories of expenses:

• Food
• Transportation
• Healthcare
• Education
• Taxes

How does the cost of living vary by location?

The price of goods and services may vary by location because of differences in the local economy. The cost of living is often different from state to state, region to region, and city to city.

For example, the state of Hawaii has the highest cost of living in the U.S., while West Virginia has the lowest.² Generally, states on the two coasts have a higher cost of living than states in the Midwest or South.

If you’re deciding whether to move to another state or city, though, the cost of living probably isn’t your only consideration. Your social life and future career opportunities are also important factors.

In some cases, you might be willing to accept a higher cost of living if it means landing your dream job or living close to family. If so, you will need to manage your budget and possibly adjust your money habits to continue hitting important financial milestones.

Your spending power may change with the cost of living

Cities with thriving urban centers tend to have higher costs of living than areas with declining populations and weak economies. For example, $100 would buy significantly more goods and services in a rural community in the South than it might in Los Angeles or New York City.

Living in a location with a high cost of living means your dollars may not go as far. You might live in Amarillo, TX, and earn a salary of $50,000. If you move to Brooklyn, NY, you’d need to earn 48% more to maintain the same standard of living.

Your standard of living may change when you move

If you’re planning to move to another state or city, be sure to do some research. You might use an online cost of living calculator, like this one from Forbes, to compare the cost of living in your current city or town with your new location. This will give you an idea of how much you need to earn to maintain the standard of living you are used to.

If you find that your new location might be difficult to afford, consider the ways mentioned below to reduce your cost of living. It is also important to plan ahead if you think you might need help paying for moving expenses.

Why does the cost of living change?

Prices continually change for everything, so your cost of living might fluctuate from month to month or year to year. To understand how prices move up and down, the government publishes several indexes.

Among the most closely followed is the Bureau of Labor Statistics Consumer Price Index (CPI), which tracks how much the prices of goods and services have changed and is often used as a measure of inflation. An index is provided for the entire U.S. and for states and various cities.

It's important to understand that costs across the board do not rise equally. The CPI measures  prices for the major groups of goods and services that consumers pay for, including food, housing, apparel, transportation, medical care, and education.³ Keep in mind that the CPI only measures the average change of prices over time and does not include investment items, such as stocks, bonds, or real estate. 

What is the cost of living index?

A cost of living index measures the amount that consumers need to spend to reach a certain standard of living. While the CPI tracks prices for goods and services, the government does not provide an official cost of living index.⁴ Some private organizations, however, calculate their own indexes, which might be helpful when comparing different locations.

How are inflation and the cost of living connected?

While related, inflation and the cost of living are not the same. Inflation is the overall increase in the price of items. The cost of living is how much money is needed to pay for those items. During periods of high inflation expenses may rise faster than usual, pushing up the cost of living.

What is a cost of living adjustment?

Although the government does not publish a cost of living index, the Social Security Administration does use economic data  to try to ensure that retirees maintain their standards of living.⁵ Each year a cost of living adjustment (COLA) is made to reflect the impact of higher prices due to inflation. Employers often apply cost of living adjustments  to set the amount of salary raises each year.

How can you manage your own cost of living?

Your personal cost of living is determined by your decisions about how to spend your money. Knowing how to calculate and limit your personal cost of living could be key to reaching your financial goals. It might help you make smart decisions about where to live, what to spend your money on, and how to plan for the future.

“Trying to figure out how much things will cost each week is rough, and making ends meet is still a challenge,” Jannings said. “But we’re doing a pretty good job, and now we’re able to get back to building up our savings. Overall, things are beginning to look up.”

What are ways to reduce your cost of living?

You may reduce your cost of living by looking for steps to lower your expenses. There are several ways to lower your expenses that you might consider.

• Living in a smaller home or apartment
• Eating at home
• Riding your bike or taking public transportation
• Canceling unused subscriptions
• Shopping at discount outlets or during promotional sales

You might also take a look at payments you are making on any outstanding debt. You might consider consolidating higher-interest debts with a personal loan, which may help you save money on interest and add some breathing room to your budget. That way, you might be able to lower your cost of living and simplify your finances at the same time. If you choose this path, you can apply in minutes with Discover® Personal Loans .

Want to learn ways to budget your money better and manage your own cost of living, wherever you live?

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