Background: Hi, I’m a mod over at r/cscareerquestions, and sometimes-lurker here. I recently got frustrated by posters using cost of living websites somewhat naively to compare ‘effective’ salaries, and created this thread as a response. u/moneysloths then suggested that I crosspost it to this sub, so here it is.
By popular ^demand
Every once in a while here, someone helpfully points out that earning minimum wage in Smallsville is the same thing as earning one million dollars in San Francisco, and then I have to explain that handy dandy cost of living (CoL) data sites like Numbeo or Best Places, while useful, don’t tell the whole story. Nowhere close to it, in fact.
Now I’m not here to argue that places like SF and NYC aren’t very expensive (they are), but these websites often exaggerate the difference even so. Here’s why you can’t just take a salary from one area and naively multiply it by the difference in cost of living that a website tells you about.
(For the sake of simplicity, I’m conflating big city with expensive city here, since those two attributes are usually correlated. I know that expensive small cities (Boulder) and cheap big cities (Detroit) also exist.)
Some things cost the same no matter where you are.
Anything digital, like your Netflix sub, or all those cheap Steam games you buy on sale, same price no matter where you are. Almost any durable good that comes out of a factory, like your laptop or a car, same price across the country. For many nerds this constitutes a sizable amount of spending.
Some things are actually effectively cheaper in bigger cities, in both obvious and subtle ways.
One of the more obvious ones is air travel, especially internationally. It’s going to be significantly cheaper (and less time/headache) to travel overseas if you live in a metro with multiple major airports, like SF or NYC, than if you live in Des Moines. A more subtle one may be, say, ‘shows’, like comedy tours or concerts or plays. Living in a small city, you’ll probably have to travel a fair distance, maybe even stay at a hotel in order to participate, whereas the person who lives in a big city can just wait for the tour to come to them.
And here’s an even trickier example: let’s say you’re comparing transportation in NYC vs Tulsa. BestPlaces, a cost of living comparison site, says that that category is more expensive in NYC. Makes sense, it’s definitely more expensive to have a car in NYC, and the transit pass probably costs more there too. Except…transit is nearly always much cheaper than owning and operating a car, and relying on transit is much more realistic in NYC (transit mode share: ~57%) than in Tulsa (transit mode share: 1.4%). Essentially, what these sites can fail to account for is how viable different strategies or lifestyles can be, and the financial impact therein.
Most things that are good about cheaper areas can be had for more money in expensive areas
…but the reverse is frequently not true: things that people move to big cities for cannot be had in cheaper areas at all. The most salient point here is, well, usually the biggest thing people cite in favor of smaller cities is the cost of housing, that they can get a big house for cheap. That’s something you can get in bigger cities, it just costs much more, so that goes into the formulas. Conversely, many of the reasons that people cite for living in a big city, like walkability or cultural diversity or a feeling of “happeningness”, simply don’t exist in smaller cities, and can’t be bought at any price.
Ok, so what? Consider: if you could get walkability in a smaller city by paying a ‘neighborhood service fee’ of $200/month, that might get taken into account in a cost of living calculator, and it’d make the bigger city look better. But since it’s not available at $200, or $500, or $10,000, or infinity dollars, it just gets ignored instead. You can’t do a price comparison for something that doesn’t exist, so they never make it into any formula, which again slants things against bigger cities.
Cost of living calculators use generic calculations that don’t take into account your particular needs and wants.
This is sort of a meta-point. Even if a CoL website accounted for all the problems above, ultimately it would still be a ballpark figure based on a hypothetical, average basket of goods. Fine for you if you’re average in your spending in every way, but otherwise you need to think about your particular spending habits, and your particular values and priorities. Someone for whom the number one priority is owning a big house will probably be well-served by CoL sites and should target a smaller city. Conversely, someone who places a high priority on traveling the world would probably be better served living in a major city with a major airport or two.
Savings is CoL-orthogonal if the savings will be used after you move to a different city.
This is most relevant for retirement savings: if you’re not going to retire where you currently live, then it’s the absolute dollar amount that you are able to save right now that matters, not the amount you’re saving relative to your current cost of living. This means that living early in your career in SF tends to give you a life flexibility advantage, since moving will effectively increase the purchasing power of your savings, whereas the opposite is true if you saved money living in a cheap rural area. It doesn’t matter if saving $5,000/year is a big deal and could sustain you for years in Middle-of-nowhere Arkansas, it’s not going to be terribly useful if someday you do decide that you want to try out living in Boston instead.
Cool cool cool, but what should I do with this newfound insight?
Using CoL sites is still okay for evaluating ballpark expensiveness as long as you’re aware of their biases and shortcomings. If you want to, say, look at specifics comparing two different areas, create a rough budget based on how you would live (for more on that, perhaps check out /r/personalfinance’s budgeting tag or their budgeting FAQ) in those two areas. Numbeo’s per-item breakdowns are good for this, as are the usual online tools and websites that let you estimate major costs: padmapper, craigslist, zillow, etc. With a budget in place, you can think both about your potential lifestyle in an area and its attendant costs, and also how much saving in that area would affect your financial future.