If you’ve spent too much time around economists like I have, you know that the word arbitrage means ‘to take advantage of a difference in price that does not reflect a difference in value’.
Geographic arbitrage, in the financial independence and related spheres, means taking advantage of the fact that the ratio of salary to cost of living is different in different locations. You can take advantage in one of two ways. You can find a place that has a better salary to cost ratio for your profession (or switch professions to get it), or you can earn money now in a highly paid location, and then move later to a low-cost location to make it go further. This second option depends on your ability to have a high savings rate in your current location.
Let’s look at some general and specific examples below. This is something you should think about enough to have an idea of where else you might live and why. Not everyone will want to move their lives. But it’s useful enough that you should be aware of it so you can make a conscious decision. And even moving a short difference can change your finances.
Differences Between States
The Internet is full of cost-of-living calculators. All of them work slightly differently, but they are all indexed to an average of 100 and tell the same stories. None of them is going put California at the low end. Looking at one example, the lowest cost-of-living state in 2019 is Mississippi, with an index of 86.1, while the highest is Hawaii with 192.9. In other words, by this calculation it costs on average 2.24 times as much to live in Hawaii as Mississippi. Other high-cost states include DC, California, and New York, while low cost states include Oklahoma, Arkansas, and Missouri. The general place on the list won’t be a surprise to many people, but the sheer size of the differences might be.
The median family income varies a little more depending on source. Two numbers I found for Hawaii in 2017 are $91,500 and $77,770. That is either 2.1 or 1.8 times the $43,500 median family in Mississippi for the same year. But even though the average income for Hawaii could be as much as slightly over twice as high, the cost of living is still so much higher there that it remains relatively cheaper to live in Mississippi.
This doesn’t have to be between states either. There can be big differences even between different regions of a state, or even different parts of the same metropolitan area.
Housing is a huge factor in the cost difference between different locations, as this cost can vary by several hundred percent. Others include supply and demand for jobs, length of commutes, and laws such as minimum wage, tax levels, and insurance regulations.
Now, the above examples are illustrative but are just averages. Hopefully they whet your curiosity. The practical questions you should think about are, what would my actual lifestyle cost in another location? And what could my income be there?
This is what you like to do, and how you like to live. Let’s say you live in Manhattan. You have a wife and a new kid. You need two bedrooms and want a yard. You like the outdoors and drive to the mountains on weekends. In Manhattan, a median two-bedroom apartment rents for something like $3,500. Just within the same state, you could move to Rochester (on the shores of Lake Ontario) or Syracuse (near to the Finger Lakes vineyards and the Adirondack wilderness) and get a 2-bedroom rent of $1,300 or $950, respectively. In other words, don’t think about what you could get for $3,500 in a different place. Thing about what you actually need and want, and see if it cost much less or the associated lifestyle is just much easier somewhere else.
Upstate you would be saving money, but still be close enough to take the train to visit family in the city on the weekends, and be much closer to more outdoor activities. Keep in mind too that transportation costs, insurance, and food prices are all examples of items that are greatly impacted by location. In the Manhattan example you may not have had a car, but if you did, the gas and parking prices are much lower upstate.
For another similar example see here, a couple who moved from San Francisco to Oakland and saved $80,000 a year on housing costs. The amount might seem crazy to someone (like me) not rich enough to live in San Francisco in the first place, but it really illustrates the point, and that it applies as much to differences between cities within a state or within a metro area.
The other side of the coin is the income. If you are still working, the trick to geographic arbitrage is making sure your income does not go down as much as your housing costs. This will depend a lot on the kind of job you will have.
For example, some jobs will tend to track the cost of living of the area. Hairdressers, waitresses, plumbers, or similar jobs will be like this. These are the kind of jobs that exist everywhere and therefore the pay variance tends to track the cost of living more closely than other jobs. That said, the ratio might still be favorable. Another thing to do if you have a job in this category is to look at not just whether different place is a cheaper location on average, but whether it would also give you the chance to make other changes in your life to save more of your salary. Go back to the hiking example – if the ratio of salary to rent is pretty much the same, but you’ll be able to walk out your front door to hike instead of driving two hours, that’s a big difference in cost in time and money.
Other jobs are in high demand in certain locations, and might be hard to find an equivalent paying job elsewhere. A couple of obvious examples might be the entertainment industry in LA, six- and seven-figure programming jobs in the Bay Area, or finance professionals in New York. These industries are pretty location specific, and you may have to take a big pay cut to leave, or save where you are and leave when you are ready to get a job in a different industry altogether.
For these first two types of jobs, you should not worry about absolute pay level but about whether the pay to cost-of-living ratio is a practical raise for you or whether it enables other changes. For example, I live in a Midwestern college town and work in a software job. The salary would be about 30-50% higher in some other parts of the country, but the cost of living would be at least as much higher, and I wouldn’t be able to work from 8-4:30, have a 15 minute commute, and play in local sports leagues so easily.
This also leads us to a 3rd category – remote work. It is pretty uncommon to have remote work full time, but it can be done, and more so today than in the past. If you can get remote work in a high paying industry, or start a career in a high-paying location and then go remote once you have the experience and leverage, this is a powerful tool. Many lower cost of living areas are also smaller job markets, and this lets you escape that dynamic. A related option is a traveling job, where you are remote part-time and travel to visit the client every certain number of weeks. This can also get you a higher salary than would otherwise be the norm in the arbitrage location.
Jobs that pay more
The 4th and rarest category is jobs that actually pay more in low cost of living areas. These are generally jobs such as physician jobs which come after a lot of training, time, and money, but which are needed everywhere and not just where the highly educated people and best schools are clustered. Because the kind of people that end up in these jobs are likely from expensive urban areas and have likely spent years in education or training there, it’s hard to incentivize them away. For example this physician’s blog compared NYC to Sioux Falls, SD, for a general surgeon along with a few other specialties. The surgeon earns an average $333,000 in NYC, but $383,000 in South Dakota. When you combine the drastically lower cost of living in South Dakota, it comes out to about 2-3 times more money (practically speaking) in SD for the same job. And we can assume that the pace of life and access to the outdoors is better there. If that’s what you’re looking for, this kind of thing should be hard to ignore.
This same concept can refer to retiring or working abroad. Retiring abroad can take advantage of the drastically lower cost of living in some places using the amounts saved in a higher paying area. For example, the cost in Latin America or Eastern Europe can be half or less of the US for a similarly high standard of living. Some nations actually offer retirement visas; others do not but you could legally spend several months a year there, which would be both enjoyable and money-saving, and return to the US in the summer or go someplace else.
As a strategy of geoarbitrage, living and working abroad makes the most sense if you are working remotely for a company in a richer nation, or at least working in-country for a foreign company. That way you avoid the trap of local salaries designed for the local cost of living (and for the local free healthcare and education) which can make it difficult to return later. But with an income from out of country you can have both a high standard of living and a high savings rate.
Every country is going to have its own immigration and tax laws, and job opportunities, so this is going to take a lot of research and planning on you part if it’s something you would want to do. I would recommended extended stay or travel in a target country before you decide if you really want to live there.
You may have heard that the US will tax you even if you live abroad. This is true, but with two big caveats. One, only on money after the first $100,000 you earn, and two, you can deduct the taxes paid abroad. Effectively this means you would have to make quite a bit of money before you start paying Uncle Sam a double tax, and that income would be so far above the cost of living where you were that it shouldn’t matter.
The lower cost of living often compensates for any reduced salary when moving. But the hard part, depending on what you are looking for, can be finding a job in smaller or foreign job markets. This means that the geoarbitrage strategy is sometimes a longer game. It can be something that you have in the back of your mind or practice locally, while building enough of a career that you will have more options when moving somewhere else due to your skills and connections. This leverage will also help you have more options for remote or travel work.
Where to live is not purely a math question, of course. The real goal here is not only to better your income/cost ratio, but to improve your life relative to the amount of money and time you spend. You should also have a clear understanding of what you are looking for in life, so that you can find a cheaper place that offers that. It’s all well and good to live in a place with lots of job opportunities and various amenities, but if they aren’t the ones you are looking for, then you’re really paying a higher cost of living for nothing. There’s an excellent article on breaking down the choice of where to live here.
Many people end up living where they do because they followed a first job out of school, or a significant other, and never really think about it after that. Or if they move, they do so for a recreational reason. But moving can have a huge impact on your finances. I encourage people to think about moving from a money point of view. This works best if you know what kind of lifestyle is what you want – then you can focus on finding a place where you can have that for much less time and money. That’s a practical raise that could impact your freedom and quality of life more than any paycheck bump.