The illness cost borne by households, known as out-of-pocket expenditure, was 74% of the total health expenditure in Bangladesh in 2017. Calculating economic burden of diarrhea of low-income urban community is important to identify potential cost savings strategies and prioritize policy decision to improve the quality of life of this population. This study aimed to estimate cost of illness and monthly percent expenditure borne by households due diarrhea in a low-income urban settlement of Dhaka, Bangladesh. We conducted this study in East Arichpur area of Tongi township in Dhaka, Bangladesh from September 17, 2015 to July 26, 2016. We used the World Health Organization (WHO) definition of three or more loose stool in 24 hours to enroll patients and enrolled 106 severe patients and 158 non-severe patients from Tongi General Hospital, local pharmacy and study community. The team enrolled patients between the first to third day of the illness (≤ 72 hours) and continued daily follow-up by phone until recovery. We considered direct and indirect costs to calculate cost-per-episode. We applied the published incidence rate to estimate the annual cost of diarrhea. The estimated average cost of illness for patient with severe diarrhea was US$ 27.39 [95% CI: 24.55, 30.23] (2,147 BDT), 17% of the average monthly income of the households. The average cost of illness for patient with non-severe diarrhea was US$ 6.36 [95% CI: 5.19, 7.55] (499 BDT), 4% of the average monthly income of households. A single diarrheal episode substantially affects financial condition of low-income urban community residents: a severe episode can cost almost equivalent to 4.35 days (17%) and a non-severe episode can cost almost equivalent to 1 day (4%) of household's income. Preventing diarrhea preserves health and supports financial livelihoods.