Expat's Manual

The cost of living allowance (COLA) is an allowance that is often awarded to expats who move overseas as part of a job offer and is based upon the need to ensure that the lifestyle that they enjoy in their home country can, at a very minimum, be retained if they are relocated elsewhere. As an individual who is considering a relocation, you need to ensure that any salary or allowances that you are awarded with be relative to any increases in the cost of living that you can anticipate; a move to a city that has a higher cost of living should be accompanied by a relatively higher salary. For this reason, the COLA allowance will be an important part of any contract negotiation process.


The cost of living index

Many research companies provide the cost of living index, which calculates the cost of living in major cities throughout the world by comparing the basic price of a basket of goods and services.

The Worldwide Salaries Website and the Mercer Cost of Living Index are both useful resources.

A COLA index will operate on the basis that your home country, i.e. the one that you are relocating from, has a cost of living index of 100. The cost of living in the country to which you are planning to relocate will be measured relative to this. If the cost of living in the relocation country exceeds 100 this will mean that the cost of living in that country will be higher than that you currently enjoy. The more above 100 it is the more expensive it is comparatively. Each point above 100 represents 1%, so, if a relocation country has a cost of living of 112, this means it is 12% more expensive to live there than it is for you to live in your current location. Adversely, if the new cost of living is below 100 on the index, this means the country to which you are moving is cheaper than your home country and an index of 80 will mean that the host city will be 20% cheaper than your home city.


How do the cost of living indices and the Cost of Living Allowance work together

In order to apply the cost of living index to the COLA calculation you need to understand what was included in the index calculation. The indices that are produced by companies such as Mercer and the Worldwide Salaries website are based upon a standard basket of goods and services, they do not include housing costs, taxes and education. For this reason, the index should only be used to calculate changes in disposable income.


How do you calculate the cost of living allowance?

In order to calculate the COLA you firstly need to identify what your current disposable income is, i.e. how much money you have left at the end of the month after you have paid all your fixed costs. This will essentially cover all of the items that are not included in the cost of living index provided by Mercer. Once you have done this you need to establish the cost of living index for the destination country. Again, data provided by Mercer should help you to do this or you can use data provided by government statistics.

If your spendable income is 25,000 and the index of the destination country as measured against your home country is 120, then the allowance should be calculated as follows:

Disposable income x change in index

= 25,000 x 0.2 (20%) = 5,000

This means that you will need an additional 5,000 to cover the additional expenses you will face in your destination country.


Additional costs

Before you even start the contract negotiation process you need to do thorough research on the cost of living in any destinations that you are considering relocating to. Many people make the mistake of negotiating a salary and relocation package based upon the cost of living index alone, without a sufficient understanding of the additional costs they may face. This can be fatal and may mean that you don’t achieve the fantastic lifestyle overseas that you have anticipated. At a high level there are a number of additional areas that you should base your research upon:

Cost BaseIssues to ConsiderPotential Resources

School fees (where applicable)

  • Will public education facilities be available/suitable?
  • If private education is required what is the cost of this?
  • Will a retainer be required to secure a place in school for my child (in many countries these are hefty sums)?
  • Expat forums in the destination country
  • Public and private school websites

Public transport
Owning and driving a car

  • How close can you expect to live to your work location?
  • What type of travel costs can you expect?
  • How expensive is it to own a car?
  • Will parking be available? At what cost?
  • Can you import your car or will you need to purchase a new one?
  • Expat forums in the destination country
  • Government websites

Property rental
Property purchase

  • What type of space can be expected for your budget?
  • What facilities are available?
  • What hidden costs may you anticipate?
  • Will you need to pay for insurance?
  • Internet property search engines
  • Real estate agents
  • Expat forums
  • Local newspapers

Groceries & Household Bills

  • What are the costs of everyday food items in comparison with your home country?
  • Do you have any special dietary needs? If so, can these be met in the new country? If not, what will the cost of importing suitable food be?
  • What utilities are generally included in rentals or rates? What are excluded?
  • What are the average costs of utilities?
  • Expat forums in the destination country
  • Online food stores, where available.
  • Utility provider’s websites, where available.

Income tax
Other taxes

  • What tax rate will you be changed?
  • Is tax payable on a monthly basis, upfront or in arrears?
  • Will benefits be taxed?
  • Are there any other forms of taxation you need to be aware of?
  • Destination country tax and revenue departments
  • Expat forums
  • Internal company HR

Leisure and entertainment

  • How does the cost of entertainment options compare with those in your home country?
  • Do you have any hobbies that you will wish to pursue? What are the costs of these hobbies?
  • Expat forums

Healthcare

  • Is public healthcare available?
  • What facilities are covered by public healthcare? What will need to be arranged privately?
  • What are the costs of private healthcare?
  • What are the costs of healthcare insurance?
  • Expat forums
  • Government websites

Accurately establishing the cost of living in expat destinations:

In order to answer all the questions outlined above, as well as any others that you may have, you will need to do a significant amount of research. Often you will need to compare several sources in order to ensure that the information you have been provided with is accurate and up–to-date and is applicable to your unique situation. One method of reducing the amount of time required to understand the cost of living in popular expat destinations is to consult an expat relocation guide. Each one of our expat guides contains a comprehensive breakdown of the cost of living in a number of major cities across different types of lifestyles and living options. Because our guides are written by expats who live and work in the countries themselves, you can be assured that the information is accurate. We also ensure that all material is updated on a regular basis and you will be able to instantly see the date at which all figures were prepared. This can give you the peace of mind that the information you have is reliable. If you are comparing a number of different locations as potential destinations for you and your family, you can purchase more than one guide at a reduced price and thus extremely quickly and easily see how the cost of living facts and figures stack up.

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Our Expat's Manual is updated regularly so comments about the article may have already been addressed.

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