What is the Cost of Living Index?

When I graduated from college in Arkansas and moved to New York City, I was blown away by how much more the cost of living was in the big city. I kind of knew it would be a little more expensive, but living in Manhattan day-to-day was a shock to my financial system. If you are considering moving out-of-state or are looking for prices in a new town, you may want to familiarize yourself with the cost of living index.

What an individual or family can afford in one place may be significantly less in another because of the difference in the cost of living. The Cost of Living Index compares the different prices for items such as housing, doctor visits, groceries and basic services around the country. The more these items cost, the higher the cost of living.

How Far Will Your Money Go?

Cost of Living Index

Knowing the cost of living in your area helps you determine how far you money will go. It also gives you a point of reference when negotiating the salary for a new job or asking for a raise. If you are thinking of moving, the Cost of Living Index will help you determine whether you and your family can afford to live comfortably in the area you choose to relocate to and may help you decide between jobs in two different areas.

The Cost of Living Index is based in part on the Consumer Price Index, which is compiled by the Bureau of Labor Statistics and takes into account the annual prices of common goods and services in major metropolitan areas on a monthly and annual basis. This index also helps determine the current rate of inflation. If your salary is not keeping pace with the adjustments to the cost of living index and consumer price index for your area, you may find yourself affording less with the same amount of money.

Calculating the Cost of Living

The easiest way to determine the cost of living in your area or compare it to another area is to use a cost of living calculator. A simple calculator, such as the one provided by CNN Money, takes your current salary and location and compares it to another location. For example, someone living in Charleston, South Carolina and making $40,000 a year should expect to make at least $47,000 in Seattle, Washington and pay 43 percent more for housing, 16 percent more for utilities and 14 percent more for transportation. The cost of living calculator from Bankrate.com breaks the differences down even more, comparing the cost of items such as a 12-pack of soda or basic services, like haircuts and oil changes, between two locations.

Even knowing the cost of living index in your area, you should not rely solely on the index to make decisions. For example, if you are using the cost of living index to determine your ideal salary for a new location, you must also consider other aspects of the job. A job may have a lower salary, but offer incentives such as a company car, a shorter commute to work or a strong health insurance plan to offset the salary difference and make it the more cost-effective option for an area. Factors beyond the Cost of Living Index should go into determining the type of salary needed to live the lifestyle you desire in a given area.

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