# Cost of Living: Definition, How to Calculate, Index, and Example

![Cost of Living](https://www.investopedia.com/thmb/cnsxyxI6sPsrO1LcrMueesMnIoY=/1500x0/filters:no_upscale():max_bytes(150000):strip_icc()/cost-of-living.asp-final-174921c4b73c4741aeca1503f35cc2f4.png)

*— Laura Porter / Investopedia*

## What Is the Cost of Living?

The cost of living refers to the money needed for essentials like housing, food, taxes, and healthcare in a specific location and time. It is often used to compare the expenses of living in different cities. Higher living costs, like in New York, require higher salaries to afford living in the area.

### Key Takeaways

*   Cost of living is the amount of money needed to sustain a certain standard of living by affording expenses such as housing, food, taxes, and healthcare.
*   Salaries should reflect the higher cost of living in more expensive cities like New York City.
*   The cost of living index enables comparison of the cost of living in one area to another.

## How the Cost of Living Is Used

The cost of living can be a significant factor in personal [wealth](https://www.investopedia.com/terms/w/wealth.asp) accumulation because a [salary](https://www.investopedia.com/articles/personal-finance/031115/salary-vs-hourly-how-benefits-laws-differ.asp#toc-salary) can provide a higher standard of living in a city where daily expenses such as rent, food, and entertainment are less.

In contrast, a high salary can seem insufficient in an expensive city such as New York. Changes in the Consumer Price Index (CPI) are often a [triggering event in labor and other contracts](https://www.investopedia.com/ask/answers/011915/how-consumer-price-index-cpi-used-market-escalation-contracts.asp) with escalation clauses. The contract will detail exactly how any periodic adjustments happen and what parts of the contract will change.

In a 2024 survey, Mercer, a global human resources firm, finds the [cities with the highest cost](https://www.investopedia.com/this-us-city-is-the-most-expensive-to-date-how-to-ease-the-financial-strain-11763599) of living in order are Hong Kong, Singapore, Zurich, Geneva, and Basel. New York City ranked as the [costliest city in the United States](https://www.investopedia.com/articles/personal-finance/080916/top-10-most-expensive-cities-us.asp), followed by Los Angeles, Honolulu, and San Francisco.  

## The Cost of Living Index

The [cost of living index](https://www.investopedia.com/ask/answers/100214/how-cost-living-index-calculated.asp) compares the cost of living in one area to another. The index incorporates various living expenses creating an aggregate measure that workforce entrants can use as a benchmark.

As college graduates weigh employment alternatives and currently employed job seekers [consider relocation](https://www.investopedia.com/articles/personal-finance/082014/know-cost-living-b4-taking-relocation-package.asp), the index provides an informative snapshot of rental, transportation, and grocery costs.

Mercer’s cost of living index measures prices in 226 urban areas for a basket of goods, which includes 12 large eggs, one liter of olive oil, espresso coffee at a popular cafe, one liter of gasoline (unleaded 95), men’s blue jeans, and women’s shampoo, haircut, and styling.

The Economic Policy Institute updated its [Family Budget Calculator](https://www.epi.org/resources/budget/) in January 2025 with data from 2024. The calculator helps families determine how much salary they will need to cover the cost of living in 3,143 counties in all 613 metro areas.

> **Fast Fact**
>
> Four out of six of the world’s most expensive cities are in Switzerland: Zurich (third), Geneva (fourth), Basel (fifth), and Bern (sixth).

## Most Expensive Urban Areas in the U.S.

According to The Council for Community and Economic Research, the 10 [most expensive urban areas](https://www.investopedia.com/most-expensive-us-cities-8721892) in the U.S. in 2023 (the most recent annual listing available from the council) were:

1.  New York (Manhattan)
2.  Honolulu
3.  San Jose, California
4.  San Francisco
5.  New York (Brooklyn)
6.  Orange County, California
7.  Los Angeles and Long Beach, California
8.  Washington, D.C.
9.  Boston
10.  Seattle  
     

## Least Expensive Urban Areas in the U.S.

According to The Council for Community and Economic Research, the 10 least expensive urban areas in the U.S. in 2023 (the most recent annual listing available from the council) were:

1.  Decatur, Illinois
2.  Harlingen, Texas
3.  McAllen, Texas
4.  Tupelo, Mississippi
5.  Ponca City, Oklahoma
6.  Muskogee, Oklahoma
7.  Conway, Arkansas
8.  Florence, Alabama
9.  Kalamazoo, Michigan
10.  Lawton, Oklahoma

## U.S. States Ranked by Cost of Living

The following is a list of U.S. states, districts, and territories ranked by cost of living from lowest to highest during 2024:

1.  West Virginia
2.  Oklahoma
3.  Kansas  
    
4.  Mississippi
5.  Alabama
6.  Arkansas
7.  Missouri (tied for 6th)
8.  Iowa
9.  Michigan
10.  Tennessee
11.  Indiana
12.  Georgia
13.  North Dakota
14.  South Dakota
15.  Louisiana (tied for 14th)
16.  Texas
17.  Kentucky
18.  Nebraska
19.  New Mexico
20.  Ohio
21.  Illinois
22.  Montana
23.  Minnesota
24.  Pennsylvania
25.  Wyoming
26.  South Carolina
27.  Wisconsin
28.  North Carolina
29.  Virginia
30.  Delaware
31.  Nevada
32.  Idaho
33.  Puerto Rico (tied for 32nd)
34.  Colorado (tied for 32nd
35.  Florida
36.  Utah
37.  Arizona
38.  Oregon
39.  Maine
40.  Rhode Island
41.  Connecticut
42.  New Hampshire
43.  Washington
44.  Vermont
45.  New Jersey
46.  Maryland
47.  New York
48.  Alaska
49.  District of Columbia
50.  California
51.  Massachusetts
52.  Hawaii

> **Fast Fact**
>
> Multinational corporations use the cost of living to assess expatriate salary packages for international assignees.

## Cost of Living and Wages

The rising cost of living has spurred debate over the [U.S. federal minimum wage](https://www.investopedia.com/articles/markets-economy/090516/what-are-pros-and-cons-raising-minimum-wage.asp) and the disparity between the lowest salary allowed by law and the earnings needed to maintain an adequate cost of living.

Proponents of a hike in wages cite increased worker productivity levels since 1968 as inequitably correlated to the minimum hourly rate of pay. As pay levels once tracked the increase in productivity, the divergence between earnings and worker efficiency has reached historically disproportionate levels.

By contrast, opponents of a minimum wage contend that a raise could spur higher consumer prices as employers offset rising labor costs.

### Minimum Wage

Twenty-one U.S. states raised their [minimum wage](https://www.investopedia.com/terms/m/minimum_wage.asp) on January 1, 2025. They are:

*   Alaska
*   Arizona
*   California
*   Colorado
*   Connecticut
*   Delaware
*   Illinois
*   Maine
*   Michigan
*   Minnesota
*   Missouri
*   Montana
*   Nebraska
*   New Jersey
*   New York
*   Ohio
*   Rhode Island
*   South Dakota
*   Vermont
*   Virginia
*   Washington

## Wage Increases and Cost-of-Living Adjustments (COLAs)

In 1973, Congress enacted legislation to address [cost-of-living adjustments (COLAs)](https://www.investopedia.com/terms/c/cola.asp). COLA adjustments for [Social Security](https://www.investopedia.com/terms/s/socialsecurity.asp) and [Supplemental Security Income (SSI)](https://www.investopedia.com/terms/s/ssi.asp) benefits were instituted so that the payments keep pace with inflation.

For example, in December 2022, the COLA was 8.7% due to the high levels of [inflation](https://www.investopedia.com/terms/i/inflation.asp) as a result of the COVID-19 pandemic, and the increased amounts were paid starting in January 2023. Federal SSI payment levels increased by the same percentage.

The Social Security Act requires COLAs to be based on increases in the [Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W)](https://www.investopedia.com/terms/c/cpi-w.asp).

The [Social Security Administration (SSA)](https://www.investopedia.com/terms/s/ssa.asp) announced a [COLA increase of 2.5% for 2025](https://www.investopedia.com/the-social-security-administration-announced-the-new-cost-of-living-adjustment-8725583). That’s lower than what was announced for 2024, which was 3.2%. The agency noted that the average increase over the last 10-year period was 2.6%.  

## Which U.S. State Has the Highest Cost of Living?

According to the Missouri Economic Research and Information Center, Hawaii has the [highest cost of living](https://www.investopedia.com/most-expensive-cities-to-retire-in-11727164) as of the end of 2024. It has a cost of living index of 186.9. That can be compared to the state with the lowest cost of living, which is West Virginia, with a cost of living index of 84.1.

## What Is the Most Expensive City in the U.S.?

The [most expensive city](https://www.investopedia.com/why-new-york-is-expensive-for-retirement-11737279) in the U.S. is New York City, as determined by various cost of living indexes.

## Is Living in the U.S. Expensive?

The U.S. is one of the most expensive countries in the world to live in. Additionally, expenses for healthcare and college are extraordinarily high when compared to other countries. Many [cities in the U.S. rank high](https://www.investopedia.com/looking-to-buy-a-home-avoid-these-10-most-expensive-cities-11785639) in cost of living indexes. However, as the U.S. is a large country, living costs vary depending on location.

## The Bottom Line

The cost of living refers to the expenses required to sustain a particular standard of living, including housing, food, taxes, and healthcare. It serves as a benchmark for comparing expenses across different areas and informs decisions about [salaries and relocations](https://www.investopedia.com/how-cost-of-living-differences-affect-your-job-offer-11758888).

A cost of living index aggregates these expenses, offering a detailed measure that helps individuals understand the financial requirements of different locations.

Rising living costs have ignited debates about wage increases and the need for cost-of-living adjustments. These measures seek to ensure that earnings are in step with inflation so that purchasing power is not reduced and economic stability is maintained.

> **Article Sources**
>
> 1.  Mercer. “[Cost of Living City Ranking 2024](https://www.mercer.com/insights/total-rewards/talent-mobility-insights/cost-of-living/).”
>     
> 2.  Economic Policy Institute. “[The Economic Policy Institute’s Family Budget Calculator](https://www.epi.org/publication/family-budget-calculator-documentation/).”
>     
> 3.  The Council for Community and Economic Research. “[2023 Annual Average Cost of Living Index Released](https://www.coli.org/2023-annual-average-cost-of-living-index-released/).”
>     
> 4.  Missouri Economic Research and Information Center. “[Cost of Living Data Series](https://meric.mo.gov/data/cost-living-data-series).”
>     
> 5.  Economic Policy Institute. “[Raising the Federal Minimum Wage to $15 by 2025 Would Lift the Pay of 32 Million Workers](https://www.epi.org/publication/raising-the-federal-minimum-wage-to-15-by-2025-would-lift-the-pay-of-32-million-workers/).”
>     
> 6.  Economic Policy Institute. “[Over 9.2 Million Workers Will Get a Raise on January 1 from 21 States Raising Their Minimum Wages](https://www.epi.org/blog/over-9-2-million-workers-will-get-a-raise-on-january-1-from-21-states-raising-their-minimum-wages/).”
>     
> 7.  Social Security Administration. "[Latest Cost-of-Living Adjustment](https://www.ssa.gov/oact/cola/latestCOLA.html)."
>     
> 8.  Social Security Administration. “[2023 Social Security Changes](https://www.ssa.gov/news/press/factsheets/colafacts2023.pdf).”
>     
> 9.  Social Security Administration. "[CPI for Urban Wage Earners and Clerical Workers](https://www.ssa.gov/oact/STATS/cpiw.html)."
>     
> 10.  Social Security Administration. “[Social Security Announces 2.5 Percent Benefit Increase for 2025](https://www.ssa.gov/news/press/releases/2024/#2024-10-10).”
>      
> 11.  Wise. "[Cost of Living Index by Countries](https://wise.com/gb/cost-of-living/index-by-country)."