International Cost of Living

Many first time expats accept an overseas position with high expectations for a better quality of life, luxury accommodation, and the excitement of new experiences. The reality however is a bit different, and many expats find out that life is not as glamorous as they imagined.

I definitely felt the same before our posting to Venezuela. I was certain that life in Venezuela will be easy and relaxing. But after settling in, I realized that it is not going to be so simple.

Putting aside the language barriers, and the personal safety issues, I believe that the international cost of living was the main reason for our difficulties.

One of the most challenging aspects of relocating overseas is the calculation of international cost of living, which determines what will be your salary at the host country, and has a direct effect on your adjustment to life abroad.

Many things are taking into consideration when calculating international cost of living, among them:

Cost of living difference - goods and services in your host country will either cost more or less than what it costs in your home country. Many companies use cost of living allowance (COLA) to determine the amount of payment that is needed in order to compensate for the international cost of living difference.

The basis for calculating a COLA is an index which lists the costs of the same basket of goods and services in different geographic locations. Some international cost of living indexes will comprise not only basic items, like clothing and groceries, but also more high priced products like housing, healthcare, and education. Therefore it is important to check what products are included in the index before you apply it otherwise the results won't be accurate.

In any case, the best way to calculate the most accurate cost of living index for a specific expat is to exclude from the calculation the items which are not relevant to the expat. For example if education, housing and healthcare are provided by the employer then they should be excluded from the cost of living index calculation.

Every index is valid only at a given exchange rate. As the exchange rate between the home and host currency moves, the index will move up or down even if prices remain stable. It is important, then, to be sure the exchange rate attached to the implemented index is current.

Hardship is the difference in the quality of living between cities that expats and their family experience, and the impact this difference has on their lifestyle when relocating abroad.

There are many areas in which you might experience a change in the quality of life, such as – living in a country where the dominant religious is different than yours, or living in an unsafe city, or in a country that has a low quality of medical services and education, etc'.

Many companies usually compensate their employees that face a significant deterioration in living conditions in their host country by adding payment to their salary.

Settling-in a new country involves many additional expenses. Some companies will grant a one-time payment upon your arrival to the new country, to help cover incidental and out-of-pocket expenses attributable to the overseas relocation process.

Spouse support - To facilitate the integration of spouses and their adaptation to a new environment, some companies might cover language training and cross-cultural training for the spouse. And some companies might also cover assistance towards the professional integration of spouses in the host country.

Each company applies a different policy when building a salary package for expats. In general there are three main models:

Generous Salary Package - The company applies the most generous cost of living index; free housing, utilities allowance, hardship allowance, home leave, car benefits, spouse support, settling-in allowance, education allowance.

Equalized Home Country/Host Country Package - The company applies a reasonable cost of living index, international housing allowance with employee contribution, home leave, settling-in allowance, education allowance.

Mixed Compensation Package - The company chooses the best compensation results between the home and the host countries.