Salary Negotiation: Applying cost of living indices
Cost of living indices are useful tools for judging how appropriate salary offers may be or how a move from one city to another may affect your income after taxes. Cost of living is only one factor that you should consider when weighing job and salary offers but it is an important one. A useful website for information on cost of living indices is C2ER-the Council for Community and Economic Research. You can also locate cost of living indices for specific metropolitan areas from other resources (chamber of commerce, community websites). The higher the cost of living in an area the greater will be the negative impact on your income. Conversely, a lower cost of living can be realized in a higher disposable income.
A general rule of thumb is to subtract the cost of living index for the location in which you live currently from the index of the location to which you are considering moving. This amount is then divided by the index for the location in which you live currently and finally you multiply this by 100 to yield a percent. Formula: ((COL destination- COL current)/COL current)100. Ex. Destination COL91.7 - Current COL124.6 = -32.9/124.6= -.264 X 100= -26.4. This tells you that you could tolerate a 26% reduction in after- tax income and maintain your current living standard.
If you live in an area that has a lower cost of living than an area to which you are contemplating moving, the resulting percent gives you some idea of how much you will want to increase your income to preserve your current living standards. If you are facing a situation in which the cost of living is going to be less than where you are currently, then the computation gives you an idea how much less you can earn and still preserve your current economic standards.
Simply dividing your income by the cost of living in your area gives you an idea of what your adjusted income would be. An area with a cost of living greater than 100 will have a dampening effect on your salary while an area that is more affordable results in an adjusted salary that stretches farther. For example a salary of $60,000 in a city with a cost of living index of 136 yields an adjusted salary of $44,118.