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The cost of living index (COLI) indicates how much it costs to live in a certain place based on major expense categories, such as housing, food, and transportation. While the U.S. government doesn’t provide an official cost of living index, there are several organizations that collect and share this data. Cost of living can vary widely from one place to the next and impact the lifestyle you’re able to sustain in each location based on your income. Keep reading to learn more on how cost of living works, how it’s calculated, and examples of cost of living indexes.
How Cost of Living Works
Cost of living indicates how much money you need to afford to live in a certain place. It takes into account essential expenses such as rent, food, taxes, education, transportation, and childcare. Comparing cost of living can help you figure out how far your income can stretch in certain locations. An income of $100,000, for instance, might feel luxurious in a small town in Texas, whereas you might struggle to get by with it in Manhattan. Note that cost of living has been increasing throughout the country in the past few years due to a variety of factors, including the coronavirus pandemic and supply chain issues. Prices in 2025 are more than 20% higher than they were before the pandemic in February 2020. Recommended: What Are the Different Types of Bank Accounts?
How Cost of Living Is Calculated
Cost of living is calculated based on the prices of common goods and services. Major expense categories include food, housing, transportation, taxes, and healthcare. These costs are gathered by city or region to determine that location’s overall cost of living. A cost of living index usually measures cost of living in reference to a base location or the average cost of living in the U.S., which is represented by the number 100. Other locations are then assigned a number higher or lower than 100, depending on how they compare. Let’s say, for example, that City A has a cost of living that’s 20% higher than the average. In this case, City A would have a cost of living index of 120. On the other hand, let’s say that City B’s cost of living is 25% lower than the average. In this case, City B would have a cost of living index of 75. Cities with a cost of living index lower than 100 are more affordable than the overall average (or whatever location is used as a reference point), whereas cities with a cost of living over 100 are more expensive.
Examples of COL Indexes
There are several companies and organizations that publish cost of living indexes and other tools to help you compare costs by location. Some popular indexes include:
Missouri Economic Research and Information Center (MERIC) Cost of Living Index
Economic Policy Institute (EPI) Family Budget Calculator
Council for Community and Economic Research (C2ER) Cost of Living Index
While the government doesn’t provide a cost of living index, the U.S. Bureau of Labor Statistics does publish the Consumer Price Index (CPI). The CPI measures the overall change in the cost of goods and services over time.
Comparing Cost of Living in Different Areas
If you’re thinking of moving across the country or traveling, or are simply curious how costs of living compare, you can use one of the above-mentioned tools to compare the cost of living in different areas. Using the MERIC Cost of Living Index, for example, we can see that the most expensive states are clustered in New England and the West Coast. Hawaii and Massachusetts have the highest costs of living, with COLIs of 186.9 and 145.9, respectively. On the flip side, states in the South and middle of the country tend to be more affordable. West Virginia has a COLI of 84.1, Oklahoma has a COLI of 85.7, and Kansas has a COLI of 87.0. Let’s say you’re thinking of moving from West Virginia to California. Based on this data, you would need a significantly higher income to afford the same standard of living in California as you would in West Virginia. On the flip side, moving from California to a more affordable place like Oklahoma could help if you want to cut expenses to pay off debt or save money fast. Recommended: 25 Ways to Save Money Fast
What Is a Cost of Living Adjustment?
As the cost of living rises, wages must also go up for consumers to afford goods and services. To keep up with this increase in costs, the Social Security Administration implements a cost of living adjustment (COLA) on an annual basis. The COLA 8.7% in 2023. In 2024, it was 3.2%. This year (2025), the COLA is 2.5%. The Social Security Administration adjusts Social Security benefits and Supplemental Security Income (SSI) payments according to the COLA starting on Jan. 1 each year. Some states also offer a cost of living adjustment for eligible residents receiving state benefits.
How Cost of Living Can Affect Savings
Your cost of living has a direct impact on your spending and savings. As consumer prices increase, you may find yourself spending more to maintain the same standard of living. If costs increase while your income stays the same, you may find yourself with less money left over from month to month to put toward savings. As your budget is stretched thin, you may find it takes longer to hit your savings goal than it did in the past. Recommended: Guide to High-Yield Savings Accounts
Cost of Living and Budgeting
Following a budget can help you take control of your finances, but creating a budget isn’t a one-and-done deal. As the cost of living changes, you’ll need to revisit your budget and update your expenses accordingly. You may also look for ways to increase your income to keep up with rising costs. Whether you can work toward a promotion at work, apply for a new job, or start a small business, making more money can help you keep up with the rising costs of goods and services. If you’re struggling to afford necessities, you could also consider moving to a more affordable area. As cost of living indexes reveal, the salary that leaves you barely scraping by in one city could be totally comfortable somewhere else.
The Takeaway
Where you choose to live can have a major impact on your financial situation. The cost of living can vary widely from one place to the next due to housing costs, state taxes, and other expense categories. If you’re considering moving to a new state, it’s worth doing some research on its cost of living and affordability. That way, you’ll have a clearer sense of what income you need to maintain your desired lifestyle, wherever you call home. Where you decide to bank is important, too. Lantern can help you find a high-yield savings account so you can earn interest on your hard-earned money.Search high-interest savings accounts with Lantern by SoFi today!
Frequently Asked Questions
How do you calculate cost of living index?
Which U.S. city has the highest cost of living index?
What is the cost-of-living adjustment for 2025?
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About the Author
Rebecca Safier
Rebecca Safier has nearly a decade of experience writing about personal finance. Formerly a senior writer with LendingTree and Student Loan Hero, she specializes in student loans, financial aid, and personal loans. She is certified as a student loan counselor with the National Association of Certified Credit Counselors (NACCC).
