Published in: Research | Nov. 4, 2019
There are some parts of the U.S. that are extremely cheap to live in. The problem is that most of these places also have relatively low average salaries, which tend to cancel out the financial benefits of cheaper housing, groceries, and other expenses.
However, maybe there are places that offer the best of both worlds. To try to find out, The Ascent analyzed cost of living and salary data for more than 200 of the largest metropolitan areas in the United States to see where the best combinations of high salaries and low costs of living can be found.
The Council for Community and Economic Research regularly publishes cost of living data for metropolitan areas in the United States. Specifically, they compute a Cost of Living Index, or COLI, for each metropolitan area, that takes a few weighted factors into account. Housing costs make up nearly 30% of the total and are the largest individual category. Groceries, utilities, transportation, healthcare, and the costs of services and miscellaneous goods are also factored in.
The Cost of Living Index is designed so that a score of 100 corresponds to the "average" cost of living in U.S. metropolitan areas. For example, a score of 200 would mean that it costs approximately twice the national average to live in a certain area.
Some places are just cheap to live in overall. Harlingen, Texas is the metropolitan area with the lowest overall cost of living, with a COLI of just 73.8. In other words, this means that your cost of living in Harlingen will be more than 26% less than the same standard of living in an average U.S. city.
Other cities are cheap when it comes to certain expenses. In Kalamazoo, Michigan, for example, housing costs just over half (53.3%) of the national average. In Denver, Colorado, utilities cost about 78% of what the average American pays. And in places like Columbia, South Carolina, healthcare costs are significantly less than in most metropolitan areas.
On the other side of the equation, some metropolitan areas have average salaries that are significantly higher than other parts of the U.S.
According to the latest data from the Bureau of Labor Statistics (BLS), the average salary in the United States is $51,960. However, average salaries are much higher in some areas. In the San Jose/Santa Clara metropolitan area, for example, the average salary is $80,480 per year -- almost 55% more than the national average. However, the cost of living in the San Jose area is a staggering 160% more than the U.S. average.
Not surprisingly to anyone who's tried to shop for a home there, housing costs are the main reason. In other words, you make a significantly higher salary but you can expect to pay far more for your basic living expenses.
Other metro areas at the top of the salary list are in the same boat. The San Francisco metro area is No. 2, with a $72,400 annual average salary. However, San Francisco's COLI is more than 200. Also towards the top of the list are high-cost areas such as Washington, D.C., Boston, Seattle, Hartford, and Denver, just to name a few.
As we've seen, the problem is that many of the places with the lowest costs of living also have some of the lowest salaries, and some of the places with the highest salaries cost a fortune to live in.
In other words, cost of living is a relative concept. If your annual living expenses add up to $30,000 in a certain place, but you only make $29,000, you may not feel financially secure at all. On the other hand, if your annual expenses are $60,000 somewhere else, but you make $80,000, you could be very financially comfortable indeed.
A low cost of living doesn't really help unless you're earning a high enough salary to take advantage of it. Conversely, a city that is known for high salaries isn't necessarily going to help you thrive financially if it costs too much to live there.
With that in mind, let's dig a little deeper to see which U.S. metropolitan areas offer the best combination of both. In other words, where can you earn the highest salary relative to the cost of living?
To figure this out, we divided the mean annual wage by the cost of living index in every major U.S. metropolitan area. And we found out that some metro areas are indeed great places to live for a combination of high salaries and a low cost of living. Here are the 10 best cities according to this methodology.
One interesting observation is that all of these areas have below-average costs of living. In other words, you won't find any expensive cities with disproportionately high salaries -- these are cheaper places to live that pay relatively high salaries, on average. Only five of the 10 have mean salaries greater than the national average, but all allow residents to stretch their income better than most.
Also, just to give you an idea of just how much more affordable these metropolitan areas are, consider that the median salary-to-COLI ratio in U.S. metropolitan areas is 485.3. This implies that the places on our list are anywhere from 16% to 26% more affordable than the average U.S. metropolitan area.
One final important point is that this analysis looks at metropolitan areas, not just cities. This may seem odd -- after all, there can be significantly different costs of living within the same metropolitan area. It certainly costs more to live in Manhattan than in one of the New York City metropolitan area's New Jersey suburbs, just to name one example. However, by looking at metropolitan areas, it helps to account for the fact that some people live in the city while others don't.
All other things being equal, it's obviously nicer to have a higher salary compared to our cost of living. However, it's not the only important consideration when deciding where to live. After all, if this was the only deciding factor, we'd all live in Kalamazoo or Huntsville.
As legendary investor Warren Buffett once said, "price is what you pay, value is what you get." Obviously, many Americans find tremendous value in living in or near places like New York City or San Francisco, otherwise they wouldn't deal with the relatively high costs of living. If a certain area has top-notch public schools, for example, it could make an expensive living situation more acceptable.
The bottom line is that it's great to have a high salary and low cost of living. However, these should be taken into consideration along with the other, less quantifiable, factors involved with living in a certain area before making any major life decisions.
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