When you travel to another country – or even just to another city – you'll notice how prices can be quite different from how they are back home.
You might want to take advantage of cheaper products and services or cut back on spending if everything is more expensive.
This is an example of how the cost of living affects people. Your lifestyle is influenced by how much you need to spend to live in a certain place.
Read on to find out what the cost of living means and why it matters to everyone.
What is the cost of living?
The cost of living is a measure of how much money you need to afford basic expenses in a certain place and time. Such payments often include housing, food, transportation, education, and healthcare.
It typically varies from city to city and country to country, helping you compare how much you need to live in different areas. This measure also tells you the income you’ll need to maintain a comfortable lifestyle where you live.
Keep in mind that the cost of living changes over time, often rising due to inflation.
How is the cost of living calculated?
A cost of living index compares the cost of basic expenses in different cities and regions. There are different indices from various sources, but they generally use 100 as the score that represents the average cost of living.
If an area has a cost of living below 100, it means expenses in that location are lower than average. Places with a number above 100 are more expensive than the average city or region tracked by the index.
You might come across varying calculations since each index may cover a different range of goods and services. For example, some indices could include leisure and entertainment costs in their computations while others leave them out.
If you plan to move to another city or country, it’s wise to compare your current location’s index score with the score of the place you’ll relocate to.
Why does the cost of living matter?
Sometimes, it can be tempting to make life decisions based only on opportunities to earn money. However, it might not matter much how little or how big your income is if you don’t get a hold of your expenses.
This is because your financial well-being and quality of life are directly affected by the cost of living. Here are a few ways it can come up in your daily life:
- Budgeting
Knowing the cost of living in your area can help you set a realistic budget. It allows you to assign money for needs, set aside savings, and plan for leisure spending.
- Relocation
If you're considering moving or settling down elsewhere, it’s important to know the cost of living first. This helps you assess whether your current income is enough to cover expenses in a new location.
- Income
You should factor in the cost of living when looking for a new job or renegotiating your salary. A higher cost of living, even if you haven’t moved, may require more income to maintain your standard of living.
- Money goals
Your ability to save for the future, pay off debts, and invest is influenced by your cost of living. It might be easier to put money away for short and long-term goals when your expenses are low, or at least manageable.
Complex factors dictate the cost of living, and there might not be much you can do to change it. However, knowing how it impacts your finances can help you navigate your costs wisely and stay prepared for the future.
