The cost of living refers to how much money is needed to maintain a certain standard of living at a particular time and place.
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’s also an important part of creating your family’s budget. By understanding exactly how much you need to pay for your necessities, you can better understand how much is left over for savings and make clearer financial decisions. Let’s take a closer look at how cost of living is defined, calculated, and how it might affect your budget.
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 can you manage your own cost of living?
- How does the cost of living vary by location?
- Why does the cost of living change?
- What is the cost of living index?
- 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. The total amount of your cost-of-living expenses is 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?
When comparing standard of living vs cost of living, it helps to understand what each term measures. 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 purchasing power and overall comfort your salary can provide.
This means your standard of living is more subjective than your cost of living. 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 a year on the most common categories of expenses.
Start with how much you spend on housing. This is often your biggest cost of living. Next, you'll determine how much you spend on food, transportation, healthcare, education, and taxes. Add all these numbers together to get your cost of living.
A helpful resource when determining your cost of living is a cost-of-living calculator. This tool uses your salary and current location to help you understand the salary amount you would need to pay for a similar lifestyle in a different location.
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.
Start by making a budget that works for you. Your budget will be determined by a few factors, including your cost-of-living expenses, your income, outstanding debts, and savings goals. As you're determining your budget, you can start looking at areas of your cost of living that you can cut back. This could include downsizing your housing, taking public transportation to avoid a car payment, and eating out less. Tracking your expenses via a budgeting app or a personal spreadsheet is a great way to monitor your spending and stick to your plan.
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 Oklahoma has the lowest as of the first quarter of 2026.1 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 weaker 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 50% 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 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 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. 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. 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.
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. Managing debt can be challenging and can lead to missed payments and interest accruing. You could 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. Personal loans can offer fixed payments and potential savings on interest. 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?
Frequently Asked Questions
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Your cost of living includes basic expenses like housing, transportation, food, and healthcare.
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Calculate your cost of living by adding together what you spend on housing, transportation, food, and healthcare.
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During periods of high inflation, the costs of basic expenses rise, pushing up your cost of living.
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You can reduce your cost of living by finding ways to lower your expenses. This could mean downsizing your housing, using public transportation, and sticking to a monthly budget.
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1 https://meric.mo.gov/data/cost-living-data-series