Financial Education (US)
What does HCOL and LCOL area mean? Pros and cons!
Come learn why HCOL, LCOL and MCOL are terms you need to fully understand in order to have a happier and wealthier financial life!
by Thais Daou
Find out everything about what HCOL and LCOL area mean
Do you know what HCOL and LCOL area mean? You definitely should. Because the difference between them plays a huge role in your life. Although their definitions are quite simple, the effect they cause in your life is not. So, first, we will explain both words to you. So then we can start talking about what really matters. And that is improving your quality of life.
The acronym HCOL stands for high cost of living. Logically, one can conclude that the acronym LCOL stands for the opposite definition. Meaning low cost of living. By now you should have already understood that pretty much your entire life revolves around these basic financial terms.
That being explained, we shall now discuss what both these acronyms really represent in all of our lives.
What is cost of living?
Basically, cost of living is an indicator of how expensive it is to live in a certain place. Therefore, we could use these terms to talk about districts, cities, and even countries. And, of course, it is also an indicator of a choice. But what do we mean by choice?
Well, whenever we talk about the place where you or your family (before you were born, for instance) have chosen to live, there is a variety of possibilities to consider. In other words, there is a variety of prices from stores or services that you can buy from.
For this reason, cost of living is not about how expensive a place is to live in. But one’s cost of living will mainly tell how expensive it is for a person to maintain a certain standard of living. After all, we can all choose to spend more randomly or more intelligently, regardless of how much we earn.
Hence, this article will examine different costs of living. And you must keep in mind that a cost of living indicator will always consider the average salary of a region’s residents.
What is LCOL and HCOL? Some examples!
Why the residents’ average income matter?
First things said, let us look deeper at what composes a cost of living indicator. The first thing we will analyze is the impact that income averages have on ranks. For instance, when looking at a list of, let us say, the most expensive cities to live in, do you know how the rank works? Now you do.
You must be aware that a city may have a high cost of living, or HCOL, and wages that reflect the high value of expenses. However, if this same expensive city presents an average of low wages, this HCOL are will then become a nightmare.
For example, who has not heard about the wonders of New York City or San Francisco? They are two of the most marvelous cities in the United States. However, they both are the two most expensive ones as well. This data was published by the Council for Community and Economic Research.
Conversely, an analysis by Deutsche Bank revealed that the average salary of people living in the Californian city is 42% higher than that of the residents of New York City. As a result, the cost of living in the two cities is similar, but the purchasing power is higher in San Francisco.
This tells us that we should always look at a place’s cost of living while also taking into account its residents’ purchasing power.
How is the cost of living calculated?
Now, let us talk a bit about some basic Math tools. What is cost of living? How does its calculation work?
Who calculates it? Is it the same thing as inflation? Let us find out!
There are several institutes and websites that calculate and compare the cost of living in different places. Each one of them uses its own criteria. But, in general, they always try to evaluate which items are basic to maintain the quality of life. Below is a list of the ten most common studied criteria. From the following categories, prices of more multiple items are collected every month in diverse locations all over the region:
- Domestic equipment
- School and education
- Culture, art and entertainment
- Personal expenses, and
To calculate the value of each place’s price indicator, they start by assigning a value of 100 to a reference region. Once the reference value is established, the price indicator value of other cities is calculated by comparing the cost of living to that of the reference region.
Which cities have the lowest cost of living?
Don’t ever forget what we will tell you next. There is a place on the internet where you can find out what are the world’s most and less expensive places to live in. Seriously, this information is life-changing.
Whether you are considering moving to Dubai, Sydney or Rio de Janeiro, now you can see which one is the most expensive. Not to mention in which one the purchasing power is the highest. The website’s name is Expatistan. It was created by a man who changed city four times in less than five years.
On his page, comparisons are free and rapidly done. Just to give you a taste, the most expensive city is Zurich, Switzerland. In this city, the price indicator totals 288.
The website is also available in the languages English, Spanish and Portuguese. Go visit their webpage and have fun!
Which countries have the lowest cost of living?
According to the website we talked about, below is a list, in alphabetical order, of the 20 countries that present the lowest cost of living indicators:
Pros and Cons of each
Continuing our conversation on essential financial terms, you also should also bear in mind the following: what makes an HCOL are an expensive area, and what makes an LCOL area a cheap area is the law of supply and demand. As the writer and economist Thomas Sowell once wrote, “when people bid for a relatively few homes, these homes become very expensive because of supply and demand.”
This quote also regards the advantages and disadvantages of HCOL and LCOL areas, as you can see below.
Advantages of LCOL areas
- Slower living: slow living means living at a slower pace, a way of life often foud far from the big cities.
- Cheaper housing: this is pretty much reason number one for anyone to decide to move.
- Lower taxes: as a result of paying lower taxes, one does not need too much purchasing power to live a good life.
Disadvantages of LCOL areas
- Fewer opportunities and/or commodities: not only in-person job opportunities can be difficult to find in those areas, but drug and food stores can be scarce as well. Not to mention the movies and entertainment options.
- Lower income potential: this means that your purchasing power will be lower, which also means that money should not be the most important factor in your decision.
Advantages of HCOL areas
- Greater job market opportunities: the higher the cost of living, the more job there are, however the more competition there will be.
- Higher income potential: if you manage to stand out among the competition, be prepared to rise your wage, as well as your purchasing power.
- More opportunities and better infrastructure: as opposed to LCOL areas, it will be easier to find entertainment and commodity options.
- Better education: as a result of all the abovementioned reasons, local investment in education will be larger as well.
Disadvantages of HCOL areas
- More expensive housing: higher wages are equal to higher purchasing power, which in turn is equal to more expensive housing.
- Fast-living lifestyle: as opposed to a slow living lifestyle, and due to the higher number of options, feeling the urge to accomplish and to own will be a very common consequence, which will subsequently lead to a higher level of anxiety.
- Consumerist trends: finally, due to the same reason, the local industries will probably be focused on inspiring consume.
What about MCOL?
Now that we have talked about what HCOL and LCOL areas mean, let us finish our discussion by going through a third acronym. Following the same logic as we did before, if HCOL means high cost of living, and if LCOL means low cost of living, then MCOL can only mean medium cost of living.
In other words, an area that has an average cost of living. It refers to areas that are just halfway. They can either be slightly above or below the average cost of living.
Benefits of MCOL areas
To put it another way, this is not a place where the undecided lives. On the contrary, if at the same time you enjoyed the benefits of HCOL areas (such as stable job opportunities and good wages), but you also seek the benefits of LCOL areas (like cheaper housing, for instance), then this might just be it. Your chance to reach your financial goals while enjoying a higher quality of life.
Even better: if you look for places that fit in this description, you will definitely find a list full of them.
Which is the best for your finances?
How does the cost of living affect you?
We assume that you already know where to go or not to go to adapt your needs to the average cost of living of the place where you live today. But in case you are finding it difficult to save money or intend to move to somewhere else, understanding these concepts and how they affect your life is important.
If by the end of the month you feel like you did not see where all of your money went, you may be calculating the cost of living that you need to have in the wrong way.
In addition, having money at the end of the month is very important regardless of your current situation or future goals. It is important that you have a financial reserve. So, do not make any life-changing decision before having some extra money saved.
Remote work: both pros at the same time
As briefly mentioned previously, thanks to the internet now is the perfect time to choose the lifestyle of your dreams without giving up the good wages. You can choose to be an online freelancer, run an online business, or work remotely for a company.
See how it is possible to live in an HCOL area and enjoy the perks of an LCOL area? This is one of the main benefits of surfing on the internet and finding out new things. So, keep reading us!
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