I have seen tons of articles over the years about the financial impact of where you live.
I’ve even written some of them myself. š
Today I’d like to tackle the issue of your home location’s impact on your finances.
The result can be pretty substantial.
The Different Philosophies
There are many different philosophies on why people live where they live when it relates to finances. The two main ones are:
- Live in an inexpensive place and save a ton of money in expenses. These people know that living in Davenport, Iowa is much cheaper than living in New York City, so they choose the former to keep costs as low as possible.
- Live in an expensive place because you can make more money here. These people assert (and there’s data to back them up: see The Cities Where People Earn The Biggest and Smallest Paychecks) that more expensive cities command higher salaries and thus you should live there to make more.
By the way, I’m only addressing financial issues of living where you do. There are many non-financial reasons to live in a place such as to be close to family, to be near certain recreational activities, to provide a certain lifestyle for your family, etc. I’m not addressing those in this piece.
My Thoughts
Here’s my take on the issue:
- It’s not great to live in a low cost city and make a low salary.
- It’s not great to live in a high cost city and make more, but still be no better off. Whether you are better off or not is a subject of debate. Here’s an argument for why it’s not better to live in an expensive city and here’s another (more recent and with research) that says it is. No matter the result, it does not change my recommendation.
- The “big money” is living in a low cost area and having a high salary. It’s here you can make a fortune.
Duh! Tell us something we don’t know, right? But that’s impossible! That’s what you’re probably thinking right now. Why is this? Because there’s an underlying assumption that you can’t earn a great salary in a lower cost of living area. This bias is even inherent in the philosophies above.
But I’m here to tell you that’s not the case. You just need to follow the right steps.
How to Make This Happen
Here are the key steps to live in a low cost city with a high salary:
- You must be flexible on where you live. If you can choose from many different cities, there’s a good chance you’ll find a great job in a low cost market. If you limit yourself to just a handful of cities, you’ll also limit your job prospects. Key to this is you can’t be too picky with cities. No, St. Louis does not have everything New York City has, but it has a lot. And, by the way, lots of those things NYC has are not things you want anyway!
- You need to develop your career in an industry or field that’s in demand. This gives you the best chance for a good salary.
- You need to market and grow your career. It’s vital and the reason I write about careers so much here at ESI Money.
- You need to manage your career. You may have to start your career in a specific area or city and that may be a higher cost-of-living location. But if you manage your career properly, you can eventually transition to more affordable locations. Especially these days, you can work from almost anywhere. If you build your reputation and network properly, you can be a tech worker in Kansas City for a firm in San Francisco.
The Difference It Makes is HUGE!
This probably goes without saying but the savings difference between some cities is enormous.
For instance, let’s say you make $100,000 in Kansas City. If you move to San Francisco, you need to make $183,316. If you can’t do that (if you still make $100k in SF), that’s really going to eat into your ability to save, right?
Looked at the other way, if you make $100k in San Francisco, you can live the same lifestyle in Kansas City for $54,551. Imagine how your bank account would benefit from an extra $45,449 each year for 20 or 30 years!
And it gets even better (or worse, depending how you look at it) as you make more.
If you make $200k in San Francisco, you can live the same lifestyle in Kansas City for $109,101. That’s an extra $90,899 each year! See the advantages of a high income in a low cost-of-living city?
What I Did
I’m not saying that I’m the best example of how to do this. But I am an example. And if I can do it, others certainly can — and probably do it better!
Here’s what I did with the tips above:
- I was flexible in where to live. My family was from a small town in Iowa where absolutely nothing was going on for me job-wise. That said, I could have limited the cities I would consider to only those close to my hometown. But I did not. Other than the far West and far East, I was open to living in almost any city in the U.S. Of course I had the benefit that any city I would move to would have way more to do, see, etc. than where I grew up. š
- I got an MBA (business is popular, flexible, and has high income potential) with an emphasis in marketing (also popular, flexible, and high income potential).
- I worked to grow my career.
My Results
I started out well because of the MBA. I left school with an above average salary. And in the 25 years since then, I’ve grown my salary at a much faster rate than the average population.
As I managed my career and considered new job opportunities, I always factored in the costs of a city when I received a job offer.
Of course it was not the only factor that led me to take one job over another, but it certainly was a factor in the decision.
Just so you can see how this played out, here are the cities I’ve lived in and their cost of living index (100 = average US city cost):
- Cincinnati – 93.8
- Pittsburgh – 91.5
- Nashville – 88.9
- Grand Rapids – 90.7
- Oklahoma City – 91.7
- Colorado Springs – 92.8
Overall, most people do not live in a city because it’s cheaper than another city. I get that. There are usually way more important issues that dictate where people live.
All I’m saying here is that where you live has a very big impact on your finances. At the very least, you should consider a city’s cost-of-living index before you move there. And if possible, take it a step further. Develop a high income while moving to a lower cost-of-living city. Doing so could save you hundreds of thousands of dollars over your working career.
As someone who moved from a low cost city to a high cost city for a few years, I would say that if you “have to” live in a higher cost city you need to be aware of it and take steps to minimize your costs. One of the big ones is living in a high cost city like you did in the low-cost city… I was very careful about this after I moved. I realized since I was making less than 10% more in the new city I would be losing money quickly if I didn’t make a change in my habits.
Part of the reason my wife and I moved back to our home city was the low cost- its score is 92 on that list. We’ve talked about moving in a few years, and one of the cities on the list is DC… ouch though, that is expensive.
All that said, I agree that there are a lot of other factors. For us it was family and friends lived back home. It’s not easy to move to a strange city and know no one.
I agree that this works. My first real job was at the best salary I could find but living in South Bend, IN a low cost city. Then I moved to Baltimore, another cheaper town while getting a salary based on Washington DC wages.
Finally when I moved overseas I was being paid as a US Expat but living in a very low cost of living location. I continued this for a decade and am now financially independent, with passive income paying for all expenses and all my salary less taxes going into savings, for a nearly 70% savings rate of total income each month.
I agree that pulling down a strong salary in a lower COL area plus minimizing expenses to create a huge savings gap is the way to go. Another real life case study here- 20 years from graduation to FI.
-Mike
I work for a firm that has office in San Diego, San Francisco, Los Angeles, Chicago and Detroit. I have traveled to all the offices locations and worked on project out of all of them. My home base of where I live is naturally the Detroit area.Thatās right. After living in LA for three months, San Fran for one month working on projects being put up in corporate apartment and hotel stays in Chicago and San Diego for weeks at a time, I know firsthand just how expensive these cities are. To have what I have in retirement savings, housing and all features I enjoy in Detroit you would need to pay me more than the commanding salaries of people who live in those cities. Quite a bit more. Housing is 2 to 3 times the price for the same thing along with associated taxes, food is more, transportation is different and the whole package makes me have a richer living lifestyle in a suburb of the Detroit area then any of these cities. If I were to take a job at any of the other locations I could see a jump of pay anywhere from 30% to 50%. That would not be enough. I would need probably 75% to 150% of my current salary to cover the things I can do and want in my life that I have in Detroit. To me these cities are just not worth it.
One thing I love to do is find out how much my house would be worth in the location I travel to. My $275K house in suburban Detroit would be $400K in Chicago, $800 to $900 k in San Diego, $ 1 mil in LA and $1.2 mil San Francisco. A 50% jump in salary would not even begin to cover this costs. That is the biggest expense and I probably would not own my house as I do in Detroit area but be stuck in the rent cycle out in California.
Before anyone talks about ābut its Detroitā let me put it this way, I feel safer walking in downtown Detroit that I ever did in LA, San Fran or Chicago. All big cities have their problems and people tolerate them, avoid the bad areas and you just donāt be stupid.
I donāt live in the actual city of Detroit but a suburb of Detroit that happens to be in Money magazineās top 50 cities to live in and it is a great cty. So I am happy in the burbs of Detroit.
Interesting comment. I am moving to Detroit metro from Pittsburgh in the coming months. I am currently in my mid-20s. Would you recommend Ferndale as a destination to look at homes?
Another angle. I live on the outskirts of a major metropolitan area in the Midwest, so I get most of the benefits of a bigger city. The important decision is which suburb to call home. If I were to live in the western suburbs, there is a lot more expectation to live the city lifestyle (cars, houses, etc.). Mostly higher-earning white-collar workers. I chose to live on the east side. More blue-collar, but just as close to shopping, airtports, sporting events, etc. Median Income is noticeably smaller on the east side, but still a very nice lifestyle.
As a bonus, my company is based in Chicago, so my income is comparable to my downtown Chicago counterparts. It is shocking what they pay for private schools, daycare, housing, etc. It’s like they live on the coasts!
Are you able to disclose the small town in Iowa where you grew up? Most of my Mom’s side of the family grew up in a small town outside of Des Moines called Reinbeck. It would be very interesting to know if you also grew up in that area.
I’ll email you. š
Well, that sucks! Did the comments and went to correct the email address and ‘whoosh’, gone into the ether.
I’ll check my spam folder to see if it ended up there.
Update: Not in spam folder. To the ether it went! Sorry.
I couldn’t agree more with this post. I am from Canada and I keep explaining the my friends why living in Toronto is not the best idea for them financially. A simple change in living location can easily set you ahead 5 to 10 years. It’s the difference between retiring at 55 instead of 65.
I grew up in the Davenport area and after 2 years in Chicago moved back and will make over 100k for the first time this year, seven years out of college. I’m an engineer and aside from relocating or getting into management it may be difficult to raise my salary significantly but due to the area I live in and aggressive saving I’m half way to 1M net worth.
PS Found this blog this week and love the insight and Iowa beginning.
I used to drive through Davenport all the time to see my parents. I got to know I-80 pretty well. š
I think one of the most limiting factors is the type of job you do and to have the freedom to do that in any location.
The USA also offers a wide range of cities where smaller countries don’t. But I do agree with your thinking.
Will you ever return to a higher priced city once you achieved your goals?
My case is (or was) more circumstance and timing than anything. The Great Recession came along and destroyed almost every job I’d ever held before, with one notable exception: table games dealing at a tribal casino. I had not worked for several years but was on a strict budget, flush with savings and inheritance money (about 190k), looking for the perfect PT job to supplement it. It just never materialized, certainly not under those unforgettable economic conditions, the scariest I’d ever seen. By the time I seriously considered dealing cards again, the horror was complete, my philosophy and outlook on life fixed forever, dark as hell, but still laser-focused. Always despised the job, still do, but I already knew gamblers never quit, that if not the usual range of lowlifes there would at least be the lonely retirement brigade, maybe in some quarters, what with their fixed incomes and no better ideas than to senselessly blow away their SS, pension money or nest egg portions down at the local sh*thole. True enough; I looked for just that and found it a county away; I was immediately hired FT (three years prior experience) with living wages, the full tier of benefits and some perks. Ten years later, I’m still there, still shaken by the Great Recession and how close it all was. About five years ago I noticed there were a lot of foreclosed homes still available. We had been renting a beach condo on very good terms, but I crunched all the numbers and percentages, and to my great surprise, noticed it was actually true, that there were houses so devalued (actually, priced fairly for once) and affordable that we could buy, insure, and pay utilities at the same point as our rental cost–or less. Year later, closed a deal, replace the hot water heater, a little paint and BOOM; one stunning deal in an economically depressed region that has now turned red hot. Still a beach community, still seemingly affordable to wayward Seattleites, Texans, and Californians who have now snapped up all the remaining inventory, including almost every potential building lot. Four years of building equity, overpaying the mortgage on a 30-year fixed, house and land value now almost doubled according to the county, not just some crazed realtor or speculator. The deal was so good, the gf says I really shouldn’t talk about it; others get upset, possibly resentful. I’m like whatever, that was almost pure circumstance, weird timing, the appearance of good luck versus bad . We could’ve just as easily drifted into despair or death like so many others, but we didn’t. Vaguely reminds me of Dark City if you know what I mean; there was the life before, and now things are very different, except the sky is still black everywhere, not to be trusted by my lights.