My usual response is to explain that I am a part owner in a Cost of Living web business, and in most cases I get blank stares with the follow on question, “What is that about?”
Pretty simple actually. Try answer this question: “How much do you need to earn to have a similar or better standard of living in another country?” Answer that with accuracy and you will understand the complexity that goes into figuring out what exactly you need to earn.
So why is it important to ensure that you know what your salary and benefits should be before you decide to move? What exactly is the Cost of Living, COLI, COLA and SPPP?
The Cost of Living is the cost of maintaining a certain standard of living, usually the one that you are used to living. Changes in the cost of living over time are expressed as a cost of living index or COLI, this is a theoretical price index that measures the relative cost of living over time or location, as well as the difference in the price of goods and servicesbetween locations. The way that this is worked out is by dividing the COL of one location to that of another, e.g. by dividing the COL of area A by the COL of Area B may result in an Index of 160. This index means that area A is 60% more expensive. Therefore the person that moves from Area B to Area A would need a 60% higher salary to have the same standard of living they currently experience.
Cost of living calculations are used to compare the cost of maintaining a certain standard of living in different locations around the world. Geographic differences in cost of living can be measured in terms of the purchasing power parity (PPP) rate. The PPP rate is the comparison between two countries with regards to their cost of living, hardship and exchange rate in order to have the same relative spending power and as a result a similar standard of living as you have in your current location. Using the PPP rate, employees and the man on the street can make international comparisons of income, this is the Salary Purchasing Power Parity. As market exchange rates are often volatile, affected by political and financial climates, salary comparisons need to be made with the correct calculation factors taken into account including negative cost of living and hardship factors.
The Cost of Living Allowance (COLA) in turn determines how much additional allowance over and above your current salary you need to earn in another country to compensate for a higher cost of living, hardship and the exchange rate. This is determined in part by the constant changes in a country’s cost of living index.
The question then turns to why anyone would want to use a calculator to work out what a person needs to earn when they arrive at their new destination. When you look at the above descriptions and differences in terms of the cost of living comparisons, the calculation of your salary can be rather daunting to work out. Using the correct methodology and calculator can be the difference between settling for the right salary and being comfortably well off or sitting in your new destination wishing you had not made the move.
The weathered expat knows what they are looking for when they move: a better position, salary, prospects, upward mobility, while newbies are still learning and just want experience. What both these group of people forget to consider is the differences that one country’s cost of living can be to the next and that arriving at your new destination with a salary that seems to be comparatively equal to what you are earning in your existing location may well be a lot less than what you anticipated. It is therefore important to know what fire you are heading into, that the salary and benefits you are being offered are going to compensate for your move and that you are going to maintain or improve your standard of living.
Stay tuned into us this year where we will explain each of the calculators and how they will be of use to you personally or to your organization. We will also have guest bloggers viewing their opinions on salary, the state of living as expats across the world and support groups to aid you in your transition.
Cost of living is not only about the salary that you will receive on the other side, but also about settling down, family transition and your end goal : happiness.