Cost of Living: What It Is, How It’s Calculated and City Ranks

Point of Interest

Looking at cost of living is a useful way to see if a move to a new city will stretch your dollar further or push you to tighten up your belt and overall spending.

One of the most important metrics you can look at when deciding to move or take a new job is cost of living in the new city. Your money will not stretch to the same lengths in San Francisco, California, as it will in Kalamazoo, Michigan due to a number of factors: rent, cost of utilities, cost of transportation and fuel and food costs, among others. Because of this, making the same salary in different cities will deliver a different quality of life. By understanding the cost of living in the cities you’re considering, you can see just how far your money will take you.

What does cost of living mean?

Cost of living is a phrase that refers to how much it costs to live in a particular area when compared to others and the national average. The metric takes a look at all normal expenditures like food, housing, utilities and healthcare and compares the costs from location to location. 

Researchers who study cost of living create a comparison scale or index that all cities, states or countries are compared on. The cost of living score for a single location does you no good without another location to compare it to. Cities are then assigned a score that shows how much higher or lower the cost of living is compared to the average — which is generally assigned a score of 100 — along with others across the nation so you can see whether that particularly fits your needs. 

Some cities will have a higher average food cost but lower rent or home prices, and some cities or areas will be higher or lower across the board. It just depends. For example, if New York (Manhattan), NY is the most expensive place to live in the U.S., it might have a cost of living index of 238.4.

When you compare NYC to other city scores like Boston, Massachusetts at 153.5, or Tupelo, Mississippi at 81.7, it starts to generate conclusions. You can now tell that Manhattan is more expensive to live in than Boston and significantly more expensive to live in than Tupelo. 

Cost of living calculators, like the one on this page, can then convert those index scores into actual dollar amounts for you to see the effects even clearer.

Factors that impact cost of living

While each cost of living calculator uses slightly different algorithms and data sets, the primary costs accounted for are generally the same. Researchers attempt to paint the clearest picture of how expensive or cheap a location is to live in by assessing popular costs.

1. Grocery and food

Everyone needs to eat. Because of this, the cost of living calculators takes a look at what groceries cost as well as the cost of eating out. Typically, they’ll assess the cost of regular staple items across each market like eggs, bread, milk and a fast food hamburger.

2. Housing: rent and home prices

One of the biggest cost differences between locations is the cost of rent or owning a home. Cost of living calculators will look at factors like median rent and median home price for similar property types to gauge the costs. As housing is one of the biggest expenses people incur, it can have one of the most significant impacts on a location’s cost of living.

3. Utilities: electric, gas, water, phone

In addition to rent or mortgage payments, you’ll need to cover utility costs. Cost of living calculators look at the average cost of electric, gas, water, phone, internet and more when figuring their metrics.

4. Healthcare

Another expense you’ll incur in any city is healthcare. To get the most accurate idea of the cost of living in an area, researchers look at how much it costs in an area for things like doctor visits, dental work, prescription and over the counter drugs, vet bills and eye doctor visits.

Cities with the highest cost of living

1. New York (Manhattan), NY

Coming in at a staggering 129% higher cost of living than the national average is New York, New York. Contributing factors that contribute to the a cost of living that’s well above the national average include housing at 369%, transportation at 33%, groceries at 28% and utilities at 25%.

2. San Francisco, CA

San Fran clocks in at 80% higher cost of living than the national average. The biggest expense? Housing. The cost of housing in the area is 231% higher than the national average. The median rent in the Golden City is $3,593.

3. Honolulu, HI

Because of the location of this island city, things get expensive. Groceries in Honolulu are 62% higher than the national average, utilities are 89% above and transportation is 35% over. Don’t think you’re getting off cheap with housing, though. Honolulu housing comes in at 202% over the national average, with a median home price of $1,046,899.

Source: The Council for Community and Economic Research and PayScale

Cities with the lowest cost of living

1. Harlingen, TX

At 21% cost of living below the national average, your dollar will go far in Harlingen, Texas. The most significant savings come in housing, which is 32% below the national average, and grocery costs, which are 18% below the national average.

2. McAllen, TX

Looking for affordable housing? Housing in McAllen, Texas, is 37% below the national average, with a median home price of $216,875 and a median rent of $679.38.

3. Kalamazoo, MI

Those looking for a low cost of living may want to check out life in Kalamazoo, Michigan, thanks to less expensive utilities, which are 13% below the national average, cheaper groceries, which are 19% below the national average and a median rent of $658.72.

Source: The Council for Community and Economic Research and PayScale

Tips to lower your cost of living

1. Select the right city

Just because you are offered more money for a job in a new city does not mean it’s automatically a better offer. If the cost of living in that city is significantly higher, you may be taking a pay cut with that raise and not even realize it. The best way to lower the cost of living is to ensure you’re living in a city you can afford.

2. Find ways to lower your utility costs

According to the Energy Resource Center, Americans spend $130 billion annually on wasted energy every year. By finding ways to save on your utility costs, you can lower your cost of living. Simple things like turning off lights, limiting excess water use, resealing windows and doors or even looking into solar energy can help you save.

3. Compare your salary vs. cost of living

If you’ve never looked at how your salary compares to the industry average and your cost of living, you may want to take a look. If you’re at the industry average but living in a higher cost of living area, you may be underpaid. If you fall into this category, you should consider talking to your company about a raise or possibly look for a job that pays a salary more inline with the cost of living in your area.

Next steps

Jason Lee

Personal Finance Contributor

Jason Lee is a seasoned copywriter with a passion for writing about banking, tech, personal growth, and personal finance. As a business owner, relationship strategist, and officer in the U.S. military, Jason enjoys sharing his unique knowledge base and skill set with the rest of the world.