What Is the Cost of Living?

What Is the Cost of Living?

Let me explain what the cost of living really means: it's the amount of money you need for basics like housing, food, taxes, and healthcare in a particular place and time. You often hear it used to compare how much it costs to live in different cities. If you're in a high-cost area like New York, you'll need a bigger salary just to get by.

Key Takeaways

Here's what you should remember: the cost of living covers the money required to maintain a certain lifestyle, including housing, food, taxes, and healthcare. Your salary ought to match the higher costs in pricey cities like New York City. And the cost of living index lets you compare expenses between areas directly.

How the Cost of Living Is Used

You can use the cost of living as a big factor in building your personal wealth, since a decent salary goes further in a cheaper city where rent, food, and fun cost less. On the flip side, even a high salary might not cut it in an expensive spot like New York. Shifts in the Consumer Price Index (CPI) often trigger changes in contracts with escalation clauses, and those contracts spell out exactly how adjustments work and what gets affected.

From a 2024 survey by Mercer, a global HR firm, the top expensive cities are Hong Kong, Singapore, Zurich, Geneva, and Basel. In the US, New York City is the priciest, followed by Los Angeles, Honolulu, and San Francisco.

The Cost of Living Index

The cost of living index is straightforward: it compares living costs between areas by aggregating expenses into a single measure that you can use as a benchmark, especially if you're entering the workforce. As you consider job options or moving, this index gives you a clear picture of costs for rent, transport, and groceries.

Mercer's index looks at prices in 226 cities for a basket of goods, including things like 12 large eggs, a liter of olive oil, an espresso at a cafe, a liter of unleaded gasoline, men's blue jeans, and women's shampoo, haircut, and styling. The Economic Policy Institute updated its Family Budget Calculator in January 2025 with 2024 data, so you can figure out the salary needed to cover living costs in 3,143 counties across 613 metro areas.

Fast Fact on Swiss Cities

Here's a quick note: four out of the six most expensive cities worldwide are in Switzerland—Zurich in third, Geneva fourth, Basel fifth, and Bern sixth.

U.S. States Ranked by Cost of Living

If you're looking at states, here's how they rank from lowest to highest cost of living in 2024: West Virginia, Oklahoma, Kansas, Mississippi, Alabama, Arkansas, Missouri (tied for 6th), Iowa, Michigan, Tennessee, Indiana, Georgia, North Dakota, South Dakota, Louisiana (tied for 14th), Texas, Kentucky, Nebraska, New Mexico, Ohio, Illinois, Montana, Minnesota, Pennsylvania, Wyoming, South Carolina, Wisconsin, North Carolina, Virginia, Delaware, Nevada, Idaho, Puerto Rico (tied for 32nd), Colorado (tied for 32nd), Florida, Utah, Arizona, Oregon, Maine, Rhode Island, Connecticut, New Hampshire, Washington, Vermont, New Jersey, Maryland, New York, Alaska, District of Columbia, California, Massachusetts, Hawaii.

Fast Fact on Corporate Use

Another point: multinational companies use cost of living data to set salary packages for employees sent abroad.

Cost of Living and Wages

The increasing cost of living has sparked discussions about the federal minimum wage and the gap between legal minimum pay and what's actually needed to live adequately. Those pushing for higher wages point to worker productivity gains since 1968 that haven't matched pay increases, creating a historic imbalance. Opponents argue that raising the minimum could lead to higher prices as businesses cover labor costs.

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

Back in 1973, Congress set up cost-of-living adjustments (COLAs) for Social Security and SSI to keep benefits in line with inflation. For instance, in December 2022, the COLA was 8.7% due to pandemic-related inflation, with payments starting in January 2023. These adjustments are based on the Consumer Price Index for Urban Wage Earners and Clerical Workers (CPI-W). The SSA announced a 2.5% COLA for 2025, down from 3.2% in 2024, with an average of 2.6% over the last decade.

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 index at 186.9 as of late 2024, compared to West Virginia's lowest at 84.1.

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

Various indexes confirm New York City as the most expensive in the US.

Is Living in the U.S. Expensive?

Yes, the US ranks as one of the priciest countries globally, especially for healthcare and education, though costs vary widely by location in this big country.

The Bottom Line

To wrap this up, the cost of living is about the expenses for maintaining a standard of living, covering housing, food, taxes, and healthcare. It helps you compare areas and decide on salaries or moves. The index aggregates these costs for a clear financial picture. With costs rising, there's ongoing talk about wage hikes and COLAs to keep earnings aligned with inflation and preserve your buying power.