Summary: Were you live (and the costs associated with living there) can dramatically impact your net worth.
We talked about the cost-of-living and income impact of geography in Become Wealthy by Having a High Income in a Low Cost City.
This post will take the same issue and attempt to put some numbers to it.
The debate still rages on as to which is better:
- To live in a low-cost state and earn (what some say is more likely) a lower income
- To live in a high-cost state and (likely) earn a higher income
In other words, assuming the assumptions above about lower cost meaning lower income and vice versa, which is a better trade-off financially? Does the higher income make up for the higher costs?
Of course I don’t like to compromise, so that’s why I wrote about having a large income in a low-cost city. 🙂
But in this post we’ll try to determine which is the better choice if you had to pick one.
A Great Example of High Income in Low-Cost Area
This whole line of thinking was stirred up again a couple months ago when I read The Case for Working in Silicon Valley and Living in the Rust Belt. It begins with this intro:
When software engineer Eric Anderle and his wife, Rachel, decided they were tired of renting and wanted to buy, they quickly realized that any place in their neighborhood—San Francisco’s spiffy NoPa district—would be out of reach. Rather than look in surrounding towns or across the bay to Oakland, the 25-year-olds staged an escape. Last fall they moved into a four-bedroom house an hour south of Grand Rapids, Mich.
The monthly mortgage payment on their 3,000-square-foot home there is about the same as the rent on the couple’s old 600-square-foot apartment. Best of all, Anderle didn’t have to give up his sweet Silicon Valley gig at Twilio. He persuaded the cloud communications company to let him not only work but also live remotely. “We really did like living in the Bay Area,” Anderle says. “We couldn’t see a viable path to do that that didn’t involve delaying the things we wanted for 10 years while we saved.”
What made me laugh about this was the real estate contrast between San Francisco and Grand Rapids (they even show pictures of the differences). I sent a note to my friend Sam with a smile because he lives in and owns property in SF while I lived in and own properties in GR. 🙂
Anyway, this is exactly the point I was making earlier. If you can make a big-bucks salary and live in a low cost of living city, you can become very wealthy. That’s why I recommend you do both.
Looking at the Data
In an attempt to sort out the low/low versus high/high debate, I found cost data by state and a list of income by state. Fortunately, a couple of sites put these two pieces of information together to see where the trade-offs net out.
My Money Blog lists states where incomes are more valuable. Basically it takes cost data and adjusts for income, then ranks the states best to worst.
According to their data, the best states to live in (where per capita incomes have the most purchasing power) are:
- North Dakota
- Connecticut
- District of Columbia
- Wyoming
- Massachusetts
- Nebraska
And the worst states are:
- Utah
- New Mexico
- Arizona
- Idaho
- Hawaii
However, this info might not be 100%. Here’s a comment left on the site:
I think this is interesting, though this data misses two key things
1. Taxes. I don’t believe state taxes such as property or income are included in this, so that can make a big difference
2. While it looks at rents, it doesn’t look at real estate prices. For example, rents may be 2x difference between states, but values could be 4x (i.e. the higher cost state tolerates lower rental yields).
I think those two additions would make this skew even more…
But I found another (better?) option comparing costs and incomes by state including all the factors we want plus a few “extras”. Here are the details:
Twelve factors were analyzed and divided up into five categories as follows:
- Jobs and income: Median household income and state unemployment rate
- Housing: Median home listing price and effective state property tax
- Lifestyle: State tax rate, annual child care costs, cost of groceries and school district grades
- Healthcare: Average family health insurance premium and percentage of employer contribution to employee health insurance
- Safety: Violent crime rates and property crime rates
Using this criteria, they list the best states to live in for a cost/income relationship to be:
- New Hampshire
- North Dakota
- Delaware
- Montana
- Wyoming
And the worst states are:
- Washington, DC
- California
- Illinois
- Connecticut
- Nevada
Ok, so some thoughts on all this:
- North Dakota and Wyoming make both lists, so they seem to be clear winners. Good combination of decent incomes and low costs.
- Connecticut and District of Columbia are sending mixed messages — tops on one list and bottom on another. I’ll call it a wash and throw them both out.
- Neither list can agree on what the worst states are.
- None of this is conclusive (as it never is) but if anything it points to the fact that higher cost-of-living states do not make up for those higher costs with their higher incomes.
Yes, yes, there are caveats. For instance, this is state info and the results could be different if we used city data.
In addition, there are posts out there that draw the completely opposite conclusion. But based on what I’ve seen I think it’s more the exception than the rule that high costs are more than offset by high incomes.
High Income Plus Low Costs!
All this comes back around to the main issue: why settle? Why not develop a high income while living in a low cost-of-living city? If you do that you can become very wealthy.
So why wouldn’t you? The difference could be hundreds of thousands of dollars a year.
Don’t believe me? This analysis says there’s a $65k difference PER YEAR between Houston and San Francisco — and those are just the averages. What if the Houston person had a high-paying job? The spread could be $100k per year! Add that up (including investment returns) for 40 years and see what it gets you. 🙂
So in the end we have yet another data point that says living in a high cost-of-living area (state this time) is not compensated for by the (supposedly) higher incomes in that area.
Of course, there are exceptions. Personal finance is personal and there is example after example of times when it does pay off. But on average I think the best bet is to live in a lower cost-of-living area and make a decent income. Or better yet, make a LARGE income. 🙂
What’s your take on this issue?
P.S. As happens quite frequently after I finish and schedule a post (I work about a month in advance), I found another article that reinforces the points made above.
The Business Insider has a post on the best and worst states to make a living. Their overall conclusion:
Not all states are created equal when it comes to making a living. While your income might be greater in places like New York or California, high tax rates and cost of living can greatly affect your lifestyle.
Of the ten “best states”, only four had costs higher than an average U.S. city and three of those were less than 2% higher. Of the ten “worst states” all but one had costs higher than the average with six of them at least 20% more expensive. Conclusion: higher incomes in more expensive states do not overcome the higher costs of living in those states.
North Dakota makes the “best” list again, so I guess it is best.
I’ve lived in three of the “best” states (Ohio, Michigan, and Colorado) and none of the “worst” states.
P.P.S. And yet another one found the next day. This lists the best cities for building wealth. It does have a broader list of high cost and low cost cities, though much of the results are driven through real estate appreciation, something that can’t be counted on over the long term.
photo credit: Street market in Dar-Es-Salaam via photopin (license)
It’s a great plan if you can do it. I think that most high-cost area are that way because they provide many high-paying jobs and vice-versa. If you can get a high-paying job in a low-cost area – go for it! I would think that physicians or executives at the local “big company” have the best shot. And sure, if you can telecommute to a silicon valley employer, that works too.
Of everything I read, the most amazing thing I found was that you work one month out on your articles – holy cow, that’s awesome!
Our firm has offices in Chicago, Los Angeles, San Francisco and San Diego and I live in suburbs of Detroit. When I have traveled out there to work on various projects in these cities, I have checked into housing in both rent and home ownership. It is a hobby of mine to discover what it cost to live in different location. If I were to get a job in any of those locations I would only see a 20% to 30% increase in salary but would be facing rent that is typically 50% to 100% higher for an apartment and two to three times as much for housing.
A coworker took me to her house in Oakland Ca and it was a nice 1100 sq.ft. 2 bed one bath house 1 car garage on a 3000 sq. ft. lot. in a decent to OK school district. The cost of her house was $650,000. When I told her I have a 1800 sq.ft. 3 bedroom, 2 full bath, 2 car garage on a 8500 sq. ft. lot in one of the best school districts in the area and I bought it for $250,000 she was amazed. She bought her house after her divorce with the dividing of assets ( her ex made quite a bit more than her) and she cashed out her 401k….. not a wise choice. We are the same age of in out 50’s
If I wanted to live in these locations I would need to find a different line of work however I love my work that I do so I am happy living were I do and the money I make doing it.
Exactly! You gave a real-life example of what this post is about! Thanks!
We live in Denver. Bought a fixer-upper for $200k in 2009. I put some blood, sweat and tears and about $50k into it for about 10-12 months at night until it was ready for the family to move into. Now Zillow says it’s worth $500k. But the best part is that our mortgage is only approximately $1,000/mo. in a city where most folks are paying $2-3k/mo. This allows my wife to stay home with the kids and not feel pressure to work.
In all my reading about people who have built wealth, a theme seems to be that housing was an expense that they all managed to conquer. There are a lot of creative solutions. Conversely when I’ve talk to people about their personal finances, their ability to compromise on their housing seems to be a determinant of how much progress they’ll make. For instance, I know someone who wants to build wealth and especially to pay off some debt, but they don’t want to give up their $2,500/mo. rental in a nice part of town.
First of all, I’m in Colorado too! Not too far from you!!!
Second, congrats on buying in Denver in 2009! The market is on FIRE!!!!!
Finally, I have a series of posts coming up on the book “Stop Acting Rich” and one of the main points is exactly what you note: “[Of] people who have built wealth, a theme seems to be that housing was an expense that they all managed to conquer.”
I am also in CO. But bought my first house in VA… 1998. Sold in 2005… never have to worry about housing again. Blessed I am.
I am completely on the bus of “live in low cost area with large income.”
We made the move a few years ago, just about an hour inland, and that has dropped our cost of living by almost $3,000/month. On top of that we have just about doubled our income since making that move.
Sometime in the next couple of years, we may consider making a move to a state with no state income taxes. Here in California, our income is moving us into the top bracket around 12% on top of federal income taxes.
We will see, we haven’t gotten to serious about it yet, but we have discussed it.
I lived these principles in my career. Let’s see- when I started working I was paid a good salary living in Indiana, where the COL is pretty low. Then I had an offer to transfer to So Cal but with the same salary so didn’t take it. Instead I took a job back on the East Coast in Maryland with a 30% pay rise. Then joined a start up that paid much more than the previous job but I still lived in my place in Baltimore and telecommuted or went down to Northern Virginia a few times a week while earning much more.
Later I moved to SE Asia for a strong US based salary while living a very low cost lifestyle. So count me in as another person who had this work out in their favor.
-Mike
I guess I disagree with this article since I live in one of the “worst states” on the initial list, but heck, I also live 5 minutes from skiing and having mountain biking out my back door, my son gets to be on the ski team, and I wouldn’t trade it for anything. I suppose the cost of housing is expensive, but it’s less than other ski towns, and way less than SF of NYC, and income can be location independent these days depending on what you do. My best friend from law school lives in Honolulu, another crazy expensive city, and she’d say the same thing since she gets to surf every morning if she wants. YOLO!
You disagree with the facts? 🙂
It seems to me that you don’t really disagree as much as you recognize that life is about more than simply saving as much as you can. People make all sorts of financial decisions that cost this or that and some choose to live in a high cost of living area for one reason or another. Is that what you mean? If so, we’re on the same page. Yes, you could save more by living elsewhere, but that’s your choice.
BTW, almost everyone could live in a cheaper area. I live in a low cost-of-living city in a mid-range state. I could certainly move to the boondocks in a cheap state and pay a fraction of what I pay now. But it’s worth it to me to live where I do. So we are alike in that way, it’s just that my city/state combo is less costly than many others.
The people who really “disagree” are ones that argue that 1) the costs aren’t that high really (oh yes they are) or 2) that higher incomes make up for the higher costs (oh no they don’t). These are the people that I have had a 10+ year disagreement with over two blogs. 🙂
A few thoughts on your particular situation:
1. There are other (cheaper) states to live in if skiing is your thing. I happen to live in one.
2. Even in an expensive state, you can live in a less expensive city.
3. I love the “if she wants” part of the friend’s story. A lot of the people I’ve talked to through the years tout the fact that they could do this or that in a particular city anytime they want. Then I ask if they ever do those things and more times than not, they say “no”. They are paying a lot for the right to easily do something that they never do. Not to say this is your friend, but it is a common situation I experience with people who live in pricey cities.
I live in northeast Pennsylvania (Lehigh Valley) where the cost of living is relatively low but worked in New Jersey making a very good income. New Jersey has a much higher cost of living (being close to NYC) and, accordingly wages are much higher. The commute into NJ was less than 30 minutes. I got the best of both worlds.
I’ve always thought that the Twin Cities is a great bargain when it comes to cost of living and income. It appears to be on the list of “best cities for building wealth” in any event. I know the midwest is seen as flyover country, but really, living in any city in the midwest seems like a way to build wealth fairly quickly. Incomes are good and it’s not hard to find a decent house. And you still get to say you live in a city – just not a cool, hip city like on the coasts.
To live in California is to deal with vicious housing prices. Cops that owned homes in the Big City Department I worked at did not live in the city. No one could afford it! Most plot to eventually take their relatively fat California pension checks and plot to move to Idaho/Montana. A few started the plan early and commute to work from there. Yes, you read that right!
I think I have this working for me to an extent but I might be lying to myself. I moved from the expensive east coast, think NYC & Boston, to Chicago and the cost of living decrease felt huge. This is relative of course as those are two of the priciest areas in the country. I received a pay increase at the time too so that helped but the top end of my salary range is lower in Chicago.
I feel like there is a lot of “rah rah go live in a low cost area” bias in this post but not as much supporting evidence that the high paying jobs in large coastal cities exist in MW cities. Does anyone have any first hand experience when it comes to finding, knowing the availability of $100k+ jobs, and what the competition for those jobs is like in MW or low cost cities? To be fair, I have not done any of this research myself yet but curious if it’s even worth it.
I know from first-hand experience. It’s the story of my career…
Good article ESI. There is a strong correlation between high paying jobs and high COL areas so if you are able to overcome that and have a combination of well paying job in a lower COL area, then it turbocharges your FIRE journey. With globally mobile jobs, it should be possible in certain professions but not in others. I have personally benefited from this combination for about 3 years which has helped a lot in my FIRE journey.
I think about this a lot because I live in the Mid-Atlantic which is relatively high cost but also really high income. I would rather get out because of the high taxes. The great thing is that my mortgage isn’t too high because I bought an older home at a good time. I do need some space though because of the large family. But I’m not sure I would move JUST to help my net worth. I really want to live near my family. Right now that means either staying where I am or moving down south. We’ll see! The good thing is that living in the south generally means lower housing costs. I just hope I am financially independent by then so I don’t have to take a huge hit in my salary while still trying to build wealth.
The best situation would be to have a job that allows you to work from home and then go live in South Dakota or something!
Just saw this posted today:
http://www.financialsamurai.com/make-millions-investment-arbitrage-opportunities/
What I found interesting from it:
“One client relocated to Portland with a different company and made the same amount. He was able to buy a mansion for $400,000 after only being able to afford renting a one bedroom in SF. Seattle and Portland are quite similar to San Francisco in terms of topography, weather, diversity, and lifestyle.”
A great example of keeping income the same and moving to a less expensive city.
Geographic arbitrage. Work it.
In medicine, it’s very easy to take advantage of the discrepancies. Some of the highest paying jobs are in the lowest cost-of-living areas. It’s a wonderful situation that doesn’t exist in many other fields.
http://www.physicianonfire.com/geographicarbitrage/
Who know South Dakota could look so nice?
Cheers!
-PoF
Washington is a very interesting case study. The Puget Sound area (Seattle, Tacoma, Bellevue) and SW Washington (across from Portland, OR) are extremely expensive real estate markets. The lack of state income tax is great, but sales tax is upwards of 9% in ,any areas.
As far as buying a mansion for $400k in Portland – that is complete BS. Lots of cash buyers coming up from the Bay Area and SoCal driving prices up.
All of this assumes a very critical aspect, that one or one’s family members do not now and in the future will need any form of safety-net (what some may refer to as “state provided benefits”).
One of the key dimensions of becoming and staying wealthy is health – which as people, as society and as a country we pay very little attention to.
If anything the current pandemic teaches us, we need to do better. While not everyone can become a millionaire, it is also true that upward mobility and the options for people to try and become a millionaire are low and dwindling rapidly.