There are certain expenses, such as rent, food, healthcare, and utilities, that are considered a normal part of everyday life. These expenses are collectively known as living expenses, and the amount of money that is needed to cover them is referred to as the cost of living.
The cost of living varies from state to state. This is why it’s crucial to conduct a cost of living comparison before deciding to move to a different state. Here’s what you need to know to determine the best states to live in based on the cost of living:
How is the Cost of Living Calculated?
It’s important to understand how the cost of living is calculated before learning about the states with the highest and lowest costs.
There are countless cost of living indexes, and each of them may use a different set of variables when calculating costs for different locations.
But in general, most of these indexes set a base cost of living, which is typically represented by the number 100. This base cost of living usually represents the cost of living in a specific city or region. For example, an index may use the city of Austin, Texas to calculate its base cost of living. If so, the cost of living index in Austin would be 100.
Once the base cost of living is set, the cost of living in other cities, regions, or states is measured and compared to this base number. For instance, say the cost of living in New York City is 50% higher than the cost of living in Austin. In this case, New York City’s cost of living index would be 150, which is 50% higher than Austin’s cost of living index of 100.
Some indexes use the average cost of living for the entire country as the base cost of living. This makes it easiest to compare different areas to determine the most and least expensive places to live.
For example, say the average cost of living in the U.S. is used as the base cost of living, which is represented by the number 100. This means any city, region, or state that is listed as greater than 100 has a cost of living that is higher than the national average.
On the other hand, the cities, regions, and states that are listed as less than 100 have a cost of living that is lower than the national average.
Which States Have the Highest Cost of Living?
The five states with the highest cost of living in the U.S. are:
- New York
Hawaii has the highest cost of living due to the increasing costs of utilities, housing, groceries, and other basic expenses in this state.
Which States Have the Lowest Cost of Living?
The five states with the lowest cost of living in the U.S. are:
- New Mexico
Mississippi has the lowest cost of living in the country due to its affordable housing, utilities, and other basic expenses. However, home insurance rates are higher in Mississippi than other parts of the country because of the risk of flooding and other types of hurricane-related damage.
Does The Cost of Living Vary Within States?
It’s important to remember that the cost of living can vary from city-to-city within each state. In general, the cost of living is higher in metropolitan areas compared to rural areas.
For example, the cost of living in Nashville, Tennessee is much higher than the cost of living in rural areas such as Memphis or Knoxville. So if you plan on moving to a specific area, make sure to look at the cost of living for that area rather than the state as a whole.
The same can be said for the state of New York. Areas such as New York City and Long Island have some of the highest costs of living in the country. But the state is also home to far more affordable areas such as Buffalo and Albany.
What Are the States With No Income Tax?
Income tax is another factor to consider when determining where to live. Most people in the U.S. are required to pay both state and federal income taxes. But there are a handful of states with no income tax, which means residents are only required to pay federal income taxes.
The states with no income tax are:
- South Dakota
Two other states, New Hampshire and Tennessee, do not tax earned income either. However, residents of these two states will need to pay taxes on interest and dividends earned through investments.
Not having to pay state income tax could significantly reduce your annual living expenses, so keep this in mind when determining where to live.
If you plan on moving to another state, it’s important to calculate the cost of living ahead of time. Doing so will help you financially prepare for the changes that your move may bring.