One major concern of many expats when they are planning a move overseas is international cost of living, and how the costs they can expect to face in their host destination will differ from those they currently experience in their home country. In this special report we explain the cost of living index and take a look at how costs of living comparisons can be used to understand salary requirements when planning a move abroad.
International cost of living differences are usually presented and discussed through a cost of living index. The cost of living index is a measurement system that compares the cost of a basket of goods and services across different countries or cities throughout the world. It is extremely important for anyone considering moving overseas as it will help you to understand what your cost of living for your preferred lifestyle and spending patterns may be.
In order to adequately assess what your cost of living in a given destination will be, you need to understand how the basket indexing system works. Each basket contains an indexed catalogue of typical goods and services. Each category of spending is weighted according to the typical spending pattern of expatriates throughout the world, i.e. the average amount that expats spend on those items. Each basket represents the % of an expat’s income that is spent on those goods or services. A typical index may look like this:
In order to calculate changes to your cost of living if you move from one country to another, you need to identify what your current costs of living are and what the costs of living will be in your chosen destination. You then compare the two numbers in order to identify what increases or decreases in salary you can realistically expect. It is useful to look at an example.
Let’s calculate an expected salary for an expat who is transferred by their company from Bangkok in Thailand to New York in the USA. For the purposes of the example we will assume that the benefit package of the employee will remain the same across the two countries and will focus on identifying what salary the employee will require to maintain their current standard of living once they have moved from Bangkok to Thailand.
Current Salary: $4,000 USD per month
Through looking at the spending patterns, the employee has identified that their expected cost of living will be 62.06% higher in New York than it will be in Bangkok. They can therefore calculate the increase in salary they will need by performing the following calculation:
$4,000 X 1.6206 = $6,482.4
The employee will need a salary in New York of $6,482.4 in order to maintain the current standard of living that they have in Bangkok.
One of the biggest challenges in calculating your cost of living is finding the data that is relevant to your own spending patterns. There are a number of major cost of living indexes published on an annual basis, such as the Mercer living cost comparison, but one of the problems with the data that these provide is that they publish the index as applied to a typical expat’s spending pattern; you may not be a typical expat.
One method of making sure that you adequately understand how international cost of living changes will impact your own situation is to research the expected changes in living expense you will face. Start by listing your monthly spend and then collate the costs of each of these items in your home country. You will then need to establish the costs you can expect to pay for these same items in your host country. You will find our relocation guides useful in doing this. Each relocation guide contains detailed lists of the costs of goods and services in the expat destination across different types of lifestyles and living options. Because each international relocation guide is written by an expat who lives and works in the countries themselves, you can be assured that the information is accurate.
If you want to learn more about international cost of living and how to calculate your cost of living allowance then please see our free expat manual. It is a very useful expat encyclopedia containing a wealth of information about moving overseas and becoming an expat. You will find the sections on expat contract negotiation and the cost of living extremely useful.
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