# How to Calculate Your Cost of Living

••• Kelly Lawrence/Demand Media
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Calculating your cost of living can be as simple as adding up your monthly expenses, or a more complicated process that helps you budget for future or discretionary spending. Using your historical financial documents and writing a list of your financial goals will help you create an accurate cost-of-living calculation to guide your spending, saving and investing.

One of the first steps in calculating your cost of living is to determine your regular expenses. Gather last year’s credit card and bank statements, along with any other financial records you have, such as PayPal statements. Write a list of your recurring monthly expenses, such as mortgage or rent, utilities, groceries, phone, cable, Internet, car payment, insurance, hair and nails, and entertainment. The Better Business Bureau provides a helpful list of household budget expenses on its website (see Resources). Next, list expenses you pay on a semi-regular basis, such as a quarterly insurance premium, and divide those by 12 to get your average monthly cost for them.

The taxes, insurance and 401(k) contributions taken out of your paycheck determine your after-tax income, and you might not want to include them in your monthly expense list. Know which ones you can stop paying, such as your 401(k) contribution, in the event you experience cash flow problems and need extra income. If you stop making these contributions and take the income, remember that this money will be taxed.

Calculate what you spend per month, on average, by totaling your annual expenses and dividing them by 12. Some expenses are fixed, such as a car payment, which doesn’t change month to month. Other expenses are variable, such as groceries. Divide your expenses into fixed and variable lists and use last year’s spending and next year’s projections to determine your monthly average for your variable expenses. Include the average monthly expense for semi-regular expenses in your monthly total.

## Formulas

Once you know what your monthly cost of living will be, multiply that by 12 to determine your annual cost of living. This will help you determine what after-tax income you will need to pay your bills. Talk with an accountant to determine what your taxes might be so you can determine what total salary, or pre-tax income, you will need to pay your expenses and taxes. One helpful rule of thumb: Financial experts recommend limiting housing costs -- including mortgage, property taxes and insurance -- to 25 to 30 percent of your pre-tax income.

## Build In Emergencies

You never know when you might have damage to your home, a medical problem, job loss or other unforeseen financial emergency, so set aside monthly savings to build an emergency fund. Taking into account your monthly expenses, existing savings, access to investments or potential help from family and friends, determine how much you should have in your emergency fund. This can be 30 days' to six months' worth of expenses, depending on your savings and earning potential.

## Plan for the Future

You might not consider a down payment on a house or a contribution to an IRA a cost of living, but if home ownership and a comfortable retirement are financial goals for you, they need to be included in your monthly budget. Add these expenses to your monthly expenses to determine your cost of living with long-term savings added.

## Cost-of-Living Calculators

If you are considering relocating to a new city, use a cost-of-living calculator to determine how much you’ll need to live in that city. You can find multiple free online calculators that let you enter your current salary and city, then the name of another city, to see what you need to make in the new city to equal the standard of living in your current city.