The "cost of living" is an abstract term that describes the amount of money that a typical person would spend on general necessities in an average year in a particular locale. It doesn’t have much significance for most people on a daily basis, but is a useful way to compare how expensive things are over time and to contrast how expensive it is to live in, say, Blanding, Utah as opposed to Waimea, Kauai. Many companies, like the Federal government, base payroll compensation in part upon the cost of living associated with the work locale. So when your socially clueless cousin visits from San Francisco and exclaims "I can’t believe how cheap everything is here! Your cost of living must be next to nothing!" you can remind him that he probably makes a lot more than you do.