Many individuals believe keeping track of the cost of living for their area is the key to successfully managing their finances and accumulating wealth in the future. This is because the cost of living for a certain area is the calculation of how much money is needed to sustain the basic expenses of daily needs, such as housing, groceries, taxes, and medical costs. If a person is aware of how much their daily needs cost, then they will be better prepared to arrange their future spending and accurately manage their savings.
While the cost of living for a city is generally consistent from year to year, the cost of living can drastically change when comparing different cities or states to live in. Everything from the price of a banana to the cost of a condo can fluctuate between and within states. For example, I am currently earning a $20,000 annual salary in Houston, Texas. However, when I use the ‘Cost of Living Calculator’ provided by CNN Money, it turns out that my annual salary in a big city like San Francisco, California would be $39,266 and would be $30,336 in Seattle, Washington.
When I look at a small city like Bloomington, Indiana, however, the annual salary I would make drops to $19,633 a year. Using the same calculator, the factors behind these differences are listed as groceries, housing, utilities, transportation, and healthcare. The calculator shows that groceries in San Francisco, California cost 44% more than they do in Houston, Texas, and housing costs a whopping 245% more! This causes the cost of living to be higher, while in Bloomington, Indiana groceries only cost 11% and housing costs 16% less, which causes the cost of living to be a much lower amount.
The real question is why the cost of living can vary so greatly by state, country, and city. Unfortunately, there isn’t a simple answer to this question. According to a business article in The Atlantic, many of the world’s most brilliant economists have spent, “decades building a framework for finding out why some prices between countries, and even between cities in the same country, differ so dramatically,” without finding a definite answer. However, there are multiple theories about which factors account for the differences in the cost of living between areas. The three main factors affecting changes in the cost of living for cities are salary, housing, and price of goods.
One of the factors accounting for differences in cost of living between cities or states is the difference between salaries or wages from area to area. The foundation of cost of living is wages; when salary levels are measured against the expenses to maintain a basic standard of living, then it’s possible to calculate the cost of living for a particular geographical area. Differences in wages for similar jobs in a variety of areas may be the result of factors such as the industry of employment, the physical or geological differences of a location, worker skill, worker experience, and credentials. Differences in the industry of employment may include diverse working conditions, clientele, and training requirements. Physical or geographical differences in a location may include local demand, geographical landmarks, altitude, accessibility of roads, availability of housing, and so on.
Another important factor for why some areas may be more expensive to live in than others is housing. The single largest consumer expenditure category is housing, and that drives most differences in the cost of living. There is a long list of reasons why a city’s cost of housing would vary so greatly from another city’s housing costs, even when those cities are relatively close to each other, but the main reason involves contrasting climates and city traits. For example, a city on the West Coast near beaches and pleasant weather may have higher housing costs due to a higher demand for luxury and vacation properties, while a city in the Midwest is more likely to have a lower demand for those types of properties. City traits that may affect housing costs for an area include landmarks that attract tourists, a thriving downtown “scene”, community services, business opportunities such as craft breweries or zoning possibilities, and educational opportunities such as universities and community colleges.
The last factor to be discussed is the price of goods and their effect on a city or state’s cost of living. The price of goods can vary from city to city or between states because of varying salary areas between areas. Services or goods that are delivered, produced, consumed, and sold locally are affected by the income levers for an area. If an area’s average income level is high, then the average price levels for that area will rise to meet them. If a city’s income levels are low, then the average price levels for that area will also be low. Other reasons that can lead to a varying price for similar goods are differences in distributor pricing and differences in quality. Stores may pay different prices for the same product due to their distributor. For example, a store that purchases goods at the retail price will sell that good for a higher amount than a store that bought the same good from a distributor in bulk for a volume discount. Differences in quality can also affect the price of goods and is common in items such as produce or items that require service quality such as prepared meals or automobiles. For example, a grocery store that sorts through its’ produce before putting it on display to make sure each item is suitable for purchase will charge more than a grocery store that just puts all the items out for sale without checking them first and not worrying about whether customers might select a rotting onion or too ripe banana.
Most people think that the cost of living for their area rising is a bad thing because it means they need to pay more for the necessities they need daily. However, the cost of living rising for an area indicates positive developments for the city or state as a whole. Employment growth and income growth can cause a city or state’s cost of living to rise. While the cost of living for a city or state is generally consistent from year to year, it can vary greatly between cities and states due to differences in salary, housing, and the price of goods. All of these factors can affect a city or state’s citizens positively or negatively and people must pay attention to their area’s cost of living, so that they may better manage their finances and work towards accumulating wealth in the future.