Cost of Living

by James & Miel on September 9, 2009 · 0 comments

A city’s cost of living is not something I considered when I was about to graduate from college and needed to find a job. Competition was stiff, and I didn’t really care where I worked. I had always lived in Indiana, but my field did not have a lot of employers in my home state, so I knew that I’d probably have to leave to get a job. Which state I went to wasn’t really important, I just needed to find work wherever I could. I was fortunate enough to land two job offers, both in the Commonwealth of Virginia. I took the one closest to D.C. (eventually moving closer for subsequent jobs), not because of its location, but because it was a better job. As anyone in my position would be, I was excited (and a little nervous) but I was in for quite a shock when I finally moved out here and experienced first hand the giant impact that living in an expensive region can have on your finances.
The last three years have been quite an education in the impact of a high cost of living. I recently visited Bankrate’s Cost of Living Comparision Calculator to see exactly what the difference is between where I live now and where I grew up, and despite being intuitively aware of the difference, it was still disheartening to enter my salary and see the difference. According to Bankrate I could take a 36% decrease in salary back home and still maintain my current standard of living. That is simply unbelievable. Words can’t describe how that made me feel.
And yet I feel like I knew that already. A friend of mine purchased a house back in Indiana – before the housing market collapse, 5 minutes from where I went to High School, for less than $100,000. Even after housing prices took a nose-dive you couldn’t buy any sort of living structure for that amount out here. My rent payment is nearly three times as much as his mortgage. It all was quite shocking to me.
A lot of people can’t help where they live. There might be only a few places in the country where they could work in their chosen area. Or maybe they prefer to live near a certain city, or want to be close to family or friends. I could always move away, and one day I will. But this experience served to illustrate the substantial difference that living in a one city or another can make.

But how are these city comparison figures generated? The United States Bureau of Labor Statistics publishes something called the Consumer Price Index, which is often mistakenly referred to as a Cost of Living Index. They are not exactly the same thing. The CPI measures the costs of certain goods and services on a city, regional and national level. A truly comprehensive Cost of Living not only takes in account the price of goods and services, but attempts quantify the quality disparity in other hard to quantify areas, such as public services and certain environmental factors. Even so, the Consumer Price Index is a good, objective, quantifiable place to start when discussing the price difference between two cities.

The Consumer Price Index is a massive index of the prices of various goods and services; covering everything from the price of chewing gum to the price of dry cleaning services. The full list of goods and services can be found here.

There are two CPI categories: CPI-U and CPI-W. CPI-W is for Urban Wage Earners and Clerical Workers, and CPI-U is all for All Urban Wage Earners, which includes everyone except the military and rural earners. CPI-W represents about a third of the population (it excludes professional, managerial, and technical workers) while the CPI-U represents roughly 80% of the U.S. population. The CPI is calculated by aggregating a series of indices that correspond to each good and service that is a part of the whole CPI. Each good or service is multiplied by a weight, and then compared to the previous period’s value to develop the rate of change of the price level of that particular good or service, as well as the rate of change of index as a whole.

The CPI is most commonly used as an economic indicator (an approximation of inflation, although it has been shown that the there isn’t a one-to-one mapping of CPI change to inflation) and is also commonly used to adjust income during union wage negotiations, as well as adjustments made to Social Security payments and other government-funded assistance.

To give you an idea of how these numbers work, we can look at the July 2009 CPI-U for both the national city average and for comparison purposes, the Midwest city average. The U.S. city average, on a 1982-84 base (meaning the CPI for 1982-84 is set at 100.00) was 215.351, whereas the Midwest city average, for the same base year, was 204.814 (the August 2009 CPI will be released on September 16th). So by looking at the numbers, you can approximately say that the Midwest is generally cheaper than average to live in. More information on the CPI can be found on Bureau of Labor Statistic’s website.

So in general, what does this mean from a personal finance standpoint? It clearly illustrates the influence that the city you choose to live in will have on your bottom line. If you are trying to build wealth, it can be quite difficult to reach your goals when it’s so expensive to live. It’s more than just rent or housing prices that are affected by your geographical region; almost every consumable good is priced differently depending on where you live. I was unaware of the extent of this influence when I first moved out East, and although I probably would have moved here anyway, it certainly wouldn’t have been such a shock.
As a reminder, you can always contact me using the link under my profile at the top right of the page. Also, I think I’m going to give Twitter a shot. If you’re so inclined, you can follow me at: @michael_DINK.
-Michael

@michael_DINK

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