Cost of living, or COL, refers to the amount of money required to cover living expenses in a set place or time. These values often consider expenses like housing, healthcare, food, entertainment and taxes.

The cost of living, explained

An area’s cost of living quantifies the income needed to maintain a decent standard of living. Since an area’s COL impacts budgets, savings potential and salary requirements, they’re handy for comparing location-dependent expenses.

Calculating the cost of living involves adding up the prices of common goods and services in an area. Here’s how to calculate the cost of living using…

An index

COL indexes measure the average cost of a “basket” of location-dependent goods and services. As such, they’re valuable for tracking price fluctuations and comparing expenses between locales.

COL indexes are calculated by summing the prices of goods and services commonly bought in an area. Then, each item or category is weighted by how much of the average budget it consumes. These expenses are totaled and fed into area-specific indexes.

There’s no official COL index in the U.S., though several organizations have created their own, including:

•  The Council for Community and Economic Research (C2ER) COL Index
• The Economic Policy Institute (EPI) Family Budget Calculator
• The ACCRA Cost of Living Index

Reading these indexes is easy. Most set either a national average or named location baseline at “100.” Then, cities or regions are assigned a number that represents how they compare to the baseline. For instance, if Boston is 50% more expensive than the national average, the city would earn a 150.

A calculator

COL calculators help you examine an area’s average COL compared to other regions. Many also break down the difference in typical costs, like housing, food and healthcare.

The Federal Reserve Bank of St. Louis provides a national COL calculator. You can also use MIT’s Living Wage Calculator to determine and compare a living wage for your family by location.

Your own budget

You can calculate your household’s annual cost of living by analyzing your expenses.

It’s just like doing your budget: add up your fixed (rent, car payment) and variable (gas, food) expenses for a year. Remember occasional or seasonal expenses like insurance premiums and holiday shopping.

The result represents your personal cost of living, which you can average annually, quarterly or monthly.

How do cost of living calculations affect you?

You can use COL comparisons to analyze affordability by location, budget and lifestyle preferences. COL indexes in particular are useful for comparing locales based on expected salaries and area-specific common expenses. (For instance, Michigan probably requires a larger winter clothing budget than Florida.)

The COL is also an important factor in many investors’ retirement portfolios. Many government benefits, like Social Security, undergo COLAs (cost of living adjustments) based on inflation, which is linked to COL. (Inflation is often measured nationally and excludes some taxes; COL is more location-specific and typically includes taxes.)

What this means for you

The cost of living varies dramatically based on where you live. But whether you prefer the Great Lakes or the Everglades, Q.ai can help you build the wealth you need to afford the cost of living where you truly feel happy and healthy.