3 ms·

That calculator is making a very common and yet very fundamental error: It assumes that cost of living adjustments should apply linearly across a salary range.

by neild 15y ago

That calculator is making a very common and yet very fundamental error: It assumes that cost of living adjustments should apply linearly across a salary range. It costs more to live in San Francisco that it does to live in Detroit. However, that additional cost is largely static: You'll pay a lot more for housing, you'll probably pay noticeably more for food, and you may pay somewhat more for clothing and other items. You won't pay more for a car (if you have one), you won't pay more for the items you buy from Amazon, and you won't pay more for your Netflix subscription. If you earn $30,000/year, the difference in cost of living between San Francisco and Detroit will be dramatic. You may not be able to afford a place to live in San Francisco at all on that salary. If you earn $300,000/year, the difference will be almost negligible, since your living expenses will be a trivial portion of your income. (The one kicker will be housing--you'll probably need to settle for a smaller living space.) It doesn't make any sense to apply a cost of living adjustment as a strict multiplier, which that calculator does. It claims that someone making $30,000 in Detroit will need an $80,000 salary in San Francisco to be equivalent, while someone making $300,000 will need $800,000. That's clearly ludicrous. It does not cost an additional $500,000 annually to live in San Francisco. Determining equivalent cost of living is a complex question, and will always be imprecise. There are things that simply can't be converted--on my current salary, I could afford to buy a house with a hundred acres of surrounding woodland near my home town. There is no amount of money in the world that will buy that in San Francisco. Equally, there are many things available in San Francisco and its environs that can't be had for love or money in my home town.

jasonlotito 15y ago
> Determining equivalent cost of living is a complex question, While that's true, the calculator presented isn't as bad as you make it out to be. It splits up the calculations across several different indexes. Food, Housing, Utilities, Transportation, Health, and Misc. It's increase is based merely on the average. This is probably fair, considering if you want to maintain the same life style you have in one location, this gives you an estimate as to what you'll need. And I imagine if you live in Detroit and spend a substantial portion of that on housing, you'll need that much of a pay raise to maintain that same level of housing. You even suggest this: "The one kicker will be housing--you'll probably need to settle for a smaller living space." That's the point. The monetary comparison assumes you maintain the same level of housing. Obviously it's not precise. However, if you accept that housing will be different, you can remove it from the equation. In this case, the overall percentage is used, but housing is the reason for that. Remove housing, and it helps get a good idea of overall living costs.
- neild 15y ago
  You can't maintain the same level of housing no matter where you are. That's what my example comparing my home town (backwoods Connecticut) with San Francisco is about--it simply doesn't make any sense at all to compare a hundred acres in rural farmland with the equivalent housing situation in a major metropolis. Cost doesn't really enter into it. The type of housing you can afford is a quality of life issue as much or more than it is a cost of living issue. If you live in San Francisco or New York, you accept a smaller living space than you'd get elsewhere. In return, you get access to nightlife, concert venues, and other amenities that can only be had in a densely-populated area. If living on a hundred acres of woodland is important to you, you will not live in San Francisco. If being able to bike to work is important to you, you will not live in Los Angeles. If staying out of the cold is important to you, you will not live in Minneapolis. Money won't buy you any of these things. At some levels, it may seem that it's just an issue of money. You can, of course, buy a detached, single-family house in San Francisco. It'll cost you millions, but you can do it if you're rich enough. Attempting to paint this as a difference in cost of living, however, is simply disingenuous--the detached home in San Francisco is the local equivalent of a mansion in my home town. It's not equivalent, any more than hiring Michael Franti to make a personal trip out to Connecticut to play for you would be equivalent to catching a show at a local concert hall. And, finally, it's important to remember that unless you're living entirely hand-to-mouth, not all of your income goes to living expenses. If you're in the well-paid engineer club, then hopefully only a relatively small portion of your income goes to living expenses. Moving from a cheap location to an expensive one may increase that portion, but it doesn't make any sense at all to multiply your current income by a constant factor to determine the "equivalent" in a different location. That's what that calculator does, and it's deceptive and wrong.
  - jasonlotito 15y ago
    > You can't maintain the same level of housing no matter where you are. I realize that, and what you said. My point was, the numbers there had housing playing a major role in affecting your cost of living. Simply put, if I wanted the same 4 bedroom, 2500 sqft house between here and San Francisco, it's going to cost me a LOT more. However, if I ignore the housing, the rest of the estimates are still useful, and as a result, you can still find out how much more or less you need to make to maintain what you are used to. > That's what that calculator does, and it's deceptive and wrong. If you look at the numbers blindly, sure. But their is value in knowing the comparative values in things besides housing. After all, it's not just giving you one single number. My argument isn't that the calculator is completely right, only that it's not completely useless as you make it out to be. Finally, you also talk a lot about other factors. While it's true, it's also pointless. Of course people aren't going to just look at the calculator and base everything off that. However, for many people, it's a helpful indication of what to expect. A 20% increase across the board for all expenses could mean someone moving for a job for a small pay raise might need to plan accordingly. Basically, knowing how much things cost relative to where you are now is important. Yes, the more money you make, the less it matters, but there are far fewer people in that situation.
justin_vanw 15y ago
I think you grossly underestimate the difference in housing costs. In the Research Triangle area of North Carolina, you can get this 1300sft house for $643/month: http://www.zillow.com/homedetails/211-Barbary-Ct-Cary-NC-27511/6455057_zpid/ http://www.zillow.com/homedetails/211-Barbary-Ct-Cary-NC-275... In Palo Alto you are looking at this 1140sft house for $4922/month: http://www.zillow.com/homedetails/4205-Wilkie-Way-Palo-Alto-CA-94306/19509298_zpid/ http://www.zillow.com/homedetails/4205-Wilkie-Way-Palo-Alto-... This is not an extreme example. Housing costs in NC are a small fraction of what they are in the valley. Also notice that the housing prices in NC are very consistent, the bubble didn't happen there. The values in Palo Alto swing up and down 30% or more in a span of 2 years. Obviously the job market is better in Palo Alto, but top talent can get a job anywhere. Consider a hypothetical engineer (software developer in east coast terminology). He might make around 100k in NC, and $140k with a good gig in the bay. After taxes, 401k, etc lets say this is a take home income of 60k and 95k. The valley engineer is paying $59064 for housing, leaving him around 36k for every other expense in his life, around $3k per month. The Raleigh engineer pays $7716 for housing, leaving him $53k, or around $4415 per month. So after you subtract housing, assuming purchase, the Raleigh engineer is better off initially. Of course, assuming Palo Alto housing prices don't plummet, the valley engineer is putting equity into the house which he can use if he moves for retirement. Of course, there are other benefits to living in the valley, such as not having to live in North Carolina. Weather, opportunities, schools, healthcare, and the job market are far better here. I previously lived near the area in NC that I'm describing, and I left to come work for a startup in Palo Alto. The quality of life here is far better. Housing is outrageous though, but that is primarily a function of geography, being in a narrow valley near the sea, there is simply no room to expand. That is why all the towns in the valley are fighting high speed rail, they know that once the pressure is released by allowing easy access to jobs in the valley, housing prices will drop shockingly.
- mgkimsal 15y ago
  So after you subtract housing, assuming purchase, the Raleigh engineer is better off initially. Of course, assuming Palo Alto housing prices don't plummet, the valley engineer is putting equity into the house which he can use if he moves for retirement. And the NC person isn't putting equity in to a house?

by neild 15y ago

jasonlotito 15y ago

> Determining equivalent cost of living is a complex question, While that's true, the calculator presented isn't as bad as you make it out to be. It splits up the calculations across several different indexes. Food, Housing, Utilities, Transportation, Health, and Misc. It's increase is based merely on the average. This is probably fair, considering if you want to maintain the same life style you have in one location, this gives you an estimate as to what you'll need. And I imagine if you live in Detroit and spend a substantial portion of that on housing, you'll need that much of a pay raise to maintain that same level of housing. You even suggest this: "The one kicker will be housing--you'll probably need to settle for a smaller living space." That's the point. The monetary comparison assumes you maintain the same level of housing. Obviously it's not precise. However, if you accept that housing will be different, you can remove it from the equation. In this case, the overall percentage is used, but housing is the reason for that. Remove housing, and it helps get a good idea of overall living costs.

neild 15y ago
You can't maintain the same level of housing no matter where you are. That's what my example comparing my home town (backwoods Connecticut) with San Francisco is about--it simply doesn't make any sense at all to compare a hundred acres in rural farmland with the equivalent housing situation in a major metropolis. Cost doesn't really enter into it. The type of housing you can afford is a quality of life issue as much or more than it is a cost of living issue. If you live in San Francisco or New York, you accept a smaller living space than you'd get elsewhere. In return, you get access to nightlife, concert venues, and other amenities that can only be had in a densely-populated area. If living on a hundred acres of woodland is important to you, you will not live in San Francisco. If being able to bike to work is important to you, you will not live in Los Angeles. If staying out of the cold is important to you, you will not live in Minneapolis. Money won't buy you any of these things. At some levels, it may seem that it's just an issue of money. You can, of course, buy a detached, single-family house in San Francisco. It'll cost you millions, but you can do it if you're rich enough. Attempting to paint this as a difference in cost of living, however, is simply disingenuous--the detached home in San Francisco is the local equivalent of a mansion in my home town. It's not equivalent, any more than hiring Michael Franti to make a personal trip out to Connecticut to play for you would be equivalent to catching a show at a local concert hall. And, finally, it's important to remember that unless you're living entirely hand-to-mouth, not all of your income goes to living expenses. If you're in the well-paid engineer club, then hopefully only a relatively small portion of your income goes to living expenses. Moving from a cheap location to an expensive one may increase that portion, but it doesn't make any sense at all to multiply your current income by a constant factor to determine the "equivalent" in a different location. That's what that calculator does, and it's deceptive and wrong.
- jasonlotito 15y ago
  > You can't maintain the same level of housing no matter where you are. I realize that, and what you said. My point was, the numbers there had housing playing a major role in affecting your cost of living. Simply put, if I wanted the same 4 bedroom, 2500 sqft house between here and San Francisco, it's going to cost me a LOT more. However, if I ignore the housing, the rest of the estimates are still useful, and as a result, you can still find out how much more or less you need to make to maintain what you are used to. > That's what that calculator does, and it's deceptive and wrong. If you look at the numbers blindly, sure. But their is value in knowing the comparative values in things besides housing. After all, it's not just giving you one single number. My argument isn't that the calculator is completely right, only that it's not completely useless as you make it out to be. Finally, you also talk a lot about other factors. While it's true, it's also pointless. Of course people aren't going to just look at the calculator and base everything off that. However, for many people, it's a helpful indication of what to expect. A 20% increase across the board for all expenses could mean someone moving for a job for a small pay raise might need to plan accordingly. Basically, knowing how much things cost relative to where you are now is important. Yes, the more money you make, the less it matters, but there are far fewer people in that situation.

justin_vanw 15y ago

I think you grossly underestimate the difference in housing costs. In the Research Triangle area of North Carolina, you can get this 1300sft house for $643/month: http://www.zillow.com/homedetails/211-Barbary-Ct-Cary-NC-27511/6455057_zpid/ http://www.zillow.com/homedetails/211-Barbary-Ct-Cary-NC-275... In Palo Alto you are looking at this 1140sft house for $4922/month: http://www.zillow.com/homedetails/4205-Wilkie-Way-Palo-Alto-CA-94306/19509298_zpid/ http://www.zillow.com/homedetails/4205-Wilkie-Way-Palo-Alto-... This is not an extreme example. Housing costs in NC are a small fraction of what they are in the valley. Also notice that the housing prices in NC are very consistent, the bubble didn't happen there. The values in Palo Alto swing up and down 30% or more in a span of 2 years. Obviously the job market is better in Palo Alto, but top talent can get a job anywhere. Consider a hypothetical engineer (software developer in east coast terminology). He might make around 100k in NC, and $140k with a good gig in the bay. After taxes, 401k, etc lets say this is a take home income of 60k and 95k. The valley engineer is paying $59064 for housing, leaving him around 36k for every other expense in his life, around $3k per month. The Raleigh engineer pays $7716 for housing, leaving him $53k, or around $4415 per month. So after you subtract housing, assuming purchase, the Raleigh engineer is better off initially. Of course, assuming Palo Alto housing prices don't plummet, the valley engineer is putting equity into the house which he can use if he moves for retirement. Of course, there are other benefits to living in the valley, such as not having to live in North Carolina. Weather, opportunities, schools, healthcare, and the job market are far better here. I previously lived near the area in NC that I'm describing, and I left to come work for a startup in Palo Alto. The quality of life here is far better. Housing is outrageous though, but that is primarily a function of geography, being in a narrow valley near the sea, there is simply no room to expand. That is why all the towns in the valley are fighting high speed rail, they know that once the pressure is released by allowing easy access to jobs in the valley, housing prices will drop shockingly.

mgkimsal 15y ago
So after you subtract housing, assuming purchase, the Raleigh engineer is better off initially. Of course, assuming Palo Alto housing prices don't plummet, the valley engineer is putting equity into the house which he can use if he moves for retirement. And the NC person isn't putting equity in to a house?