What does “cost of living” really mean and why does it vary by state?


During the COVID-19 pandemic, many people are starting to work remotely for the first time. Many people are beginning to return to their office jobs, but others continue to work remotely. Without being restricted to a physical office location, we see people relocating to different locations across the country. If you’ve lived most of your life in one place, you may be surprised to find that costs vary across states and municipalities.

What is the cost of living?

The cost of living is defined as the total amount of money required to live in a particular area. One way in which the cost of living can be measured is either as a monthly or annual raw amount. Another way you often see the cost of living measured is the cost of living index. The Society and Economic Research Council CCER has compiled, published and studied cost-of-living information at the local level since 1968.

The cost of living index usually takes the average cost of living across the entire nation and sets it as a baseline of 100. Then states or urban areas where the cost of living is higher than the national average have numbers greater than 100, and those with a lower cost of living have a lower index out of 100. This allows you to easily compare the cost of living in different places. If you live in an area with a cost of living index of 109, you know that the cost of living is about 9% higher than the national average.

What makes the cost of living formula?

There are a variety of different companies and organizations that calculate the cost of living in different locations, and each one uses a slightly different formula for the cost of living. As an example, the US Bureau of Labor Statistics publishes Consumer Price Index (CPI). The government uses the consumer price index to determine things like the Social Security cost-of-living adjustment.

The BLS calculates CPIs for the following categories in addition to a general index:

  • Food (both indoors and outdoors)
  • Energy (gasoline, fuel oil, electricity, natural gas)
  • New and used cars
  • clothes
  • healthcare
  • Shelter/housing
  • transport services

Prices for each of these areas vary from month to month and in a different state and community.

Why does the cost of living differ by country?

If you have ever traveled to or lived in different parts of the United States, you may have noticed that prices often change as you go to different areas. There are a variety of reasons why the cost of living varies by state and even within a particular state. One of the main reasons for the differences in the cost of living is how rural or urban an area is. In general, cities and urban areas have a higher cost of living than rural areas.

The cost of living for certain items can vary with other factors as well. How close a state or metropolitan area is to various natural resources can also play a factor. If you live in an area with access to oil or natural gas, it makes sense that your energy costs will be lower than other areas. Likewise, being close to farms and other food products can reduce food costs in an area. State and local tax policies also contribute to the total cost of living.

What are the countries with the lowest cost of living?

The cost of living varies by state by year as well as on the methodology used to calculate the cost of living. According to the CCER Fourth Quarter 2020 Cost of Living Index report, the 10 countries with the lowest cost of living are:

  1. Mississippi
  2. kansas
  3. Oklahoma
  4. Alabama
  5. Arkansas
  6. Georgia
  7. Tennessee
  8. Missouri
  9. Michigan
  10. Indiana

Keep in mind that these are just the average costs of living for an entire country and the cost of living will vary greatly within a country. The cost of living in rural Albany, Georgia would be much lower than living in metro Atlanta. Another thing to consider is that your income may be lower in areas with a lower cost of living, although this may not be a huge factor if you have a remote job.

bottom line

The cost of living in a state or metropolitan area is defined as the cost it takes to live in that specific location. The cost of living index is a way to normalize and compare the cost of living between different regions. The cost of living index of 100 represents the national average. Higher numbers are more expensive and lower numbers are less expensive. There are many companies and organizations that calculate cost of living indicators, and each uses slightly different formulas and prices. Moving from a higher cost of living area to one with a lower cost of living is a smart way to increase your money without increasing your income.

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Dan Miller (78 posts)

Dan Miller is a freelance writer and founder of PointsWithACrew.com, a site that helps families travel free/cheap. His main base is in Cincinnati, but he tries to travel around the world as much as possible with his wife and six children.

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