© 2015 Shmoop University, Inc. All rights reserved.
Financial Literacy

Financial Literacy

Home Finance Home Economics Cost of Living

Cost of Living

The Cost of Living: That Air You Breathe Doesn't Come Cheap

Everything has a price. That concert ticket required you to open your wallet, and your last date with the cutie in physics set you back a week's pay at your part-time job.

Even the stuff you aren't paying cash for cost someone something. That painful root canal? Yeah, you (or your parents) paid for that with insurance, probably. The free concert you attended last month? Paid by business sponsors. Even the streets you walk on and the free stuff you get (like a public school education) are paid by taxes.

The cost of just living in a place and paying for all the basics is called "the cost of living," and it's really different depending on where you live. In 2014, USA Today USA Today reported that you need to be earning $124,561 to live comfortably in San Francisco, which the newspaper ranked as the city with the highest cost of living. The same year, Harlingen, Texas was ranked as the place with the lowest cost of living. There, professionals could earn 17% less than the national average and still live well.

It works around the world, too. Deciding to settle down in London, England, or Japan will cost you a lot more than deciding to live in Nicaragua or Bulgaria.

Tallying up Costs of Living

Why does it cost so much more to live in Los Angeles or Dallas than it does to live in Lawrence, Kansas or a smaller city? Why does a house in the U.S. cost $300,000 or so while the same price gets you a fancy villa in Nicaragua? Cost of living depends on lots of stuff, including:

  • Demand. If you want to star on Broadway, you're probably headed for the Big Apple. Trouble is, lots of other people have the same dream or want to live in New York City because they want to be fashion designers…or JLo. Lots of people in one city means that eventually there's not a lot of room—which is why everyone who wants in is willing to pay $3,000/month for an apartment the size of a bed frame.
  • Wages. A city with a lot of wealth and high-paying jobs means that more people are able to afford more. Ta-da! Property owners are willing to oblige by charging more and the cost of living goes up.
  • Taxes. Paying a lot to The Man means that you have less left over from your paycheck to pay for stuff. But it can also mean that there are more social services and so-called free stuff (that you've paid with your taxes) so it can cost less to live. This tax thing is something of a balance.
  • Space. When everyone is trying to jam themselves into a tiny physical area (think Manhattan or Bel Air), the area becomes exclusive, the cost of living goes up, and soon only celebs and Fortune 500 types in suits can afford to live there.
  • The cost of necessities. Food, clothing, apartments, toothbrushes, Netflix: you probably rely on a lot of stuff to get by. When the cost of basics like food dips low, the cost of living goes down.
  • Real estate costs. A lot of things can drive up the cost of houses and apartments. College towns have lots of students looking to rent, so prices tend to increase. If oil is found in a town, the value of real estate there goes sky high (hello, Beverly Hillbillies). When the cost of buying or renting a house goes up, so does the cost of living.
  • Transportation. If a place is really remote, everything needs to be flown in—from poker chips to milk. If a place is easily reached by boat, train, or truck, then the cost of getting stuff to your local stores is less and you pay less for what you buy. That's why a single melon costs $16 in Nome, Alaska, but probably only costs a few bucks if you live in Idaho or Georgia.

Why Should You Care About Cost of Living?

It costs what it costs to live wherever you live—whether that's Connecticut or Dallas or Timbuktu. So why should you care?

Understanding the cost of living can help you make decisions about your job. If you're living in New York and Chicago, you're going to have to earn more at your job (even if you don't mind living with six roommates and two dogs) than you would in smaller city in Texas.

Even the government cares about cost of living. The Bureau of Labor Statistics is always busy tallying up the Consumer Price Index (CPI), which measures how much basic necessities cost. This information is used when deciding what a fair wage looks like and when the government decides which social benefits are fair. It can also be used to talk about inflation. You can feel free to drop "CPI" into conversations if you just want to sound like a future MBA. That's okay, too.

Here's another reason to sit up and take notice: You can get more bang for your buck, in some cases, if you're willing to move.

Let's say you start a business making the most amazing phone cases anyone has ever seen. Kanye is on the phone, sobbing because he wants one so bad, and you tell him "I'll think about it, sweetie" because you're already rolling in millions. 

Life is good. But that $5 million in Los Angeles may just buy you a little bungalow. Head a few states over to Colorado, where the cost of living is lower, and you could be living it up on hundreds of acres and a ranch house bigger than a city block.

Your $5 million might make you a small business in a big city and really, really rich somewhere where costs of living are lower. Plus, if you move your fabulous phone case operation to another city or another state, you may spend less on your factory, marketing, and everything else you need to run your business, so you can become even wealthier.

Whether or not that's worth it is up for you to decide.

People who Shmooped this also Shmooped...

Noodle's College Search