3

I've been looking at some cost of living calculators and there's something that makes me a bit skeptical about them.

For example if city B is supposedly 100% more costly to live in than city A, the calculator tells you:

If you make $100,000 in city A, you must make $200,000 in city B.

If you make $200,000 in city A, you must make $400,000 in city B.

If you make $300,000 in city A, you must make $600,000 in city B.

etc.

But intuitively, it seems more appropriate to do these calculations in terms of your expenditures?

For example:

If you SPEND $100,000 in city A, you will need to SPEND $200,000 in city B.

If you SPEND $200,000 in city A, you will need to SPEND $400,000 in city B.

And this would be independent from how much you actually earn, except that you need to account for income tax.

That seems to make more intuitive sense to me, but I don't see any calculators doing the calculation like that, so is it an incorrect model? (I recognize that either way is an over-simplification)

I see there are some related questions on here but I don't think any of them address the income vs expenditure aspect directly.

Outback
  • 131
  • 1

1 Answers1

1

One thing to keep in mind is that although many sites phrase their results in terms of income, they are actually computed on the basis of expenditures. If you compare two cities at BestPlaces.net or numbeo.com, for instance, the top-line result will say "you would need to earn...", but then they show you big list of. . . expenses. (Or some kind of "cost index" that reflects a difference in expenses.) Some sites try to go further and incorporate income estimates (by, e.g., forecasting the job market in a given city), but in my experience that is less common.

My guess is that they phrase the comparison in terms of income because people are more likely to know how much they make than how much they spend. Also, and equally important when considering a move, most people are more likely to have an estimate of how much they will make in the new city (e.g., from a job offer) than an estimate of how much they'll spend.

In essence, many people implicitly work with a simple financial equation: "Income - Expenses = Lifestyle". Any two determine the third. It's hard to measure lifestyle in dollars, but when evaluating a new place, people can assume they want to maintain their existing lifestyle, so that's constant. Given that, it doesn't matter whether they compute income or expenses, but they're more likely to have an income number ready to hand.

BrenBarn
  • 24,042
  • 6
  • 61
  • 82