Managing Money Figure Out a Truer Cost of Living, Before You Make a Move

by Julie Anne Russell | January 07, 2020

Considering a move? Before you break out the moving boxes, take a closer look at how the real cost of living adds up.

Derek Tharp has seen Portland, ME, where he lives, grow in popularity with those fleeing high housing prices in Boston, MA, just two hours south. Although smaller, this coastal city suits people's lifestyles, as well as their pocketbooks.

And, as a financial advisor and assistant professor of finance, Tharp notes another trend, too: when moving from an expensive market to a less costly one, people don't always take advantage of the change in their cost of living. Tharp says this shift should be a boon to bank accounts. However, people often mentally still budget at the former higher price points.

The result of this skewed budgeting? The propensity to spend more because things feel cheaper. “You may not experience that whole benefit [in cost of living] because you expand consumption," says Tharp.

This quirk of human behavior is just one of the many reasons that experts say that comparing the real cost of living in two different places isn't as easy as popping numbers into a cost-of-living calculator (an online tool that compares living costs between two places) or a cost of living index (price index that measures relative cost of living over time or regions). "Individual lifestyle factors are always going to be highly unique," Tharp says, "and could have a very real impact on the true cost of living somewhere."

So, how can you more accurately assess what it will cost to live somewhere else, and how will that impact your finances? Here are pointers on how to use online tools, while still accounting for the unique factors that add up to a more true-to-life cost of living.

Quote
Individual lifestyle factors are always going to be highly unique.
End Quote

What is the cost of living?

So, what is the cost of living, exactly? It's simply the price of both big-ticket and everyday items, based on location. Housing is the most significant factor in the equation, along with transportation, utilities, food and healthcare. However, experts point out that by relying too much on indexes or calculators, you may leave out essential items.

One of those left-out items is taxes. "A lot of the calculators don't take into consideration state taxes, local taxes, property taxes or income taxes," says Tharp. Additional (or fewer) taxes can affect budgets in dramatic ways.

This oversight is something that Winona Dimeo-Ediger experienced. "I moved from Oregon to Nashville, and in Tennessee, we have no state income tax. The difference that factor alone made was huge, and since I didn't even take it into account, it was a pleasant surprise," says Dimeo-Ediger, who is editor-in-chief of Livability, a website covering small and medium-sized cities.

The average cost of living is just that — an average. One's lifestyle may not follow a median price point. "I was just talking to the mayor of a city that has a really high median home price," says Dimeo-Ediger. "They get a lot of heat for it. But as the mayor points out: That's the median. It's not like you can't find a less expensive house in that city."

Dimeo-Ediger uses her town as an example. "The price of housing is high in Nashville, but a lot of the new houses are big and modern," she says. "If you're looking for something smaller, or in a less trendy area of town, you can still find homes for an accessible price."

young family sitting on sofa reading a book together in their living room

Factor in the substitution effect

According to Tharp, real spending won’t necessarily dovetail with a cost-of-living number that a calculator spits out. Lifestyle choices — from the house you buy to the school your kids attend — impact your bottom line.

And there’s an economics principle known as the substitution effect at play here, too. The substitution effect explains why comparing the price difference between cities with an expensive housing market and a more affordable market could paint an incomplete picture.

For example, a cost-of-living calculator compares prices based on your living the same lifestyle in two different places. If moving from a more affordable suburban area to an expensive city center Tharp says, "The calculator's going to assume that somebody stays in that same type of house." But, in reality with such a move, you'd most likely downsize and choose a smaller house, because housing is more expensive per square foot — that's the substitution effect at play.

Likewise, consider a move from a city with reliable public transportation over a town where you’ll need a car. To accurately assess, you’ll need to run the numbers to show how public transportation costs compare to car payments, gas, auto insurance, repairs and parking fees.

As Tharp explains, a move may change the ways in which you spend money, from clothing to entertainment to transportation. Also, note what you might not need to budget for in a new place. “There may be entire categories of spending that go away because it’s not available in the market or you no longer need it,” Tharp says.

Calculate your own cost of living

Tharp says building a customized budget that reflects how you live and spend is a more accurate tool for gauging the real cost difference of a move.

"An online cost-of-living calculator gives you an initial, rough sense for how much more or less expensive a place is," Tharp says. "I personally wouldn't use those numbers to make life decisions. I would drill down a little deeper and actually confirm those numbers are representative of what my own situation would be."

Compare housing options, he advises, but do it by researching neighborhoods and finding the type of house you would live in and not by relying on average housing prices. Use online grocery services to compare prices from city to city based on your own shopping list.

“Build a budget that reflects your spending behavior and preferences for spending in an area,” Tharp continues. “You can account for whether or not you need a car in one market versus another or whether you’ll be happy sending your kids to [public school or] private school,” he says. “All those individual factors are highly relevant.”

Quote
Build a budget that reflects your spending behavior and preferences for spending in an area.
End Quote

Adding up the intangibles of a budget

Of course, even with a more accurate price comparison in hand, that’s hardly the whole story. There are intangibles that contribute to quality of life and overall happiness.

Cambridge, MA-based career coach Penelope Trunk helps clients assess the merits of relocating for work, and notes community as a key decision-making factor. A trusted community provides emotional and economic benefits such as helping with childcare or taking care of pets. And, as Trunk points outs, studies show that professional economic gain can't always replace the happiness we feel from spending time with loved ones.

Many of the perks of living in one place over another can't be captured in a calculator. "Looking at the cost–of-living numbers is a flat view," says Dimeo-Ediger. "When I'm talking about what makes a place affordable, or the quality of life you get for a certain price there, I'm looking a ton of things that can't even be measured."

For Dimeo-Ediger, that means the local festivals, events, access to nature, and other entertainment options that are free or low-cost. “It’s why I’m not planning to leave Nashville, because even though it’s becoming a less affordable city every day, it’s an easy place to have fun for not a lot of money,” she says. “It makes a bigger difference than people realize.”

To that point, Trunk encourages people to envision their lives in detail. "What do you imagine doing every day? Pick out an exact day. Pick Tuesday," says Trunk. If you want to start every Tuesday walking to a yoga class and then grabbing a cup of coffee in a bustling little corner cafe, well, a rural move might not suit you, no matter how affordable the cost of living may be.

Fire escapes of New York on a bright day

Finding home

Ultimately, Dimeo-Ediger says, finding a home is about much more than the numbers. It’s about the sentiment and feel of the place as well.

You need to ask yourself questions that will add to your happiness, such as, "Does it feel like this is where I'm supported, where I feel like this is my community, and this is my home?" Dimeo-Ediger says. And those are factors you just can’t plug into a calculator.

Saving Financial Education
Julie Anne Russell

is a Brooklyn-based freelance journalist. She writes on personal finance, small business, travel and more.

The content reflects the view of the authors of the article and does not necessarily reflect the views of Citi or its employees, and we do not guarantee the accuracy or completeness of the information presented in the article.