What Is the Cost of Living?

Malcolm Tatum

The cost of living is the amount of income that is required to provide an equitable living standard. At the core of this standard is the need to provide for food, clothing, and shelter. In many cultures, other items are also considered necessities and are included in the calculation when attempting to determine the average cost of living in that area.

Cost of living calculation includes utility costs.
Cost of living calculation includes utility costs.

Assessing the current living costs in a given area is important for a number of reasons. For households, identifying how much money it will take to secure basic necessities plays a large role in the task of choosing to work in a particular industry. Ideally, one full-time job is sufficient to pay monthly rent or a mortgage payment, cover utility costs, buy food for three meals a day, and purchase clothing for household members. Increasingly, the living costs in some locations, particularly metropolitan areas, make it necessary for more than one individual in a household to secure employment, or for a single person to establish an ancillary source of income in addition to a full-time job.

Inflation increases the cost of living, sometimes much faster than employees' wages rise.
Inflation increases the cost of living, sometimes much faster than employees' wages rise.

Municipalities consider the cost of living when engaging in urban planning. Understanding what it costs to maintain an equitable standard of living in the area makes it possible to identify the nature and scope of services provided by local government agencies. The figure also helps municipalities to determine tax structures as they relate to sales tax on purchases like food and gasoline, and even how to create a schedule for property taxes. Even issues such as planning housing developments or designing incentives to attract new businesses to the area must allow for the current living costs and how residents would respond to those opportunities.

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It is not unusual for people to seek locations where the cost of living allows them to enjoy more benefits based on the amount of income they generate. For example, a retired couple may choose to live in a smaller city or town where housing is less expensive, food is cheaper, and taxes are lower. Doing so makes it possible for their retirement income to cover all the essentials and still have disposable income for activities and purchases that are desirable, but not necessary. In like manner, a young person who is just beginning to get established in a career will often choose to share living space with others as a means of keeping living expenses to a minimum while still having a decent place to live.

The cost of living is not a static figure that remains the same year after year. Shifts in the costs of basic living needs result in a change in the amount of income needed to maintain a given living standard. During periods of inflation or recession, households have to make adjustments based on the impact that those economic conditions have on both the cost of essentials and the impact on income streams.

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Discussion Comments


So if the population increases while the retirees are there, and houses within that area spring up like weeds in an untamed backyard, how will the couple account for the increase in property tax?

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