In my last post, I stressed that the only way to achieve financial independence is by saving money. The faster you save, the earlier you can retire. The wildcard in this equation is how much it costs you to live. You may be able to cut out luxuries like steak dinners, alcohol, designer purses – whatever it is you splurge on – but what about rent, groceries, power? These expenses will be there no matter what, but you should still try to minimize them as much as possible.
The Cost of a Home
The money you spend to keep a roof over your head, whether it be in the form of rent payments or mortgage payments, is probably your biggest expense (it’s definitely mine). It’s also more in your control than you might think. They key is where you live.
I love watching TV shows about first time home buyers. The greatest appeal for me is seeing how much it costs to buy a standard, single family home in various parts of the country. The graph below shows the median sales price of a home in ten different parts of the country from May through October of this year.
As you can see, the cost of the median home in Washington D.C. is four times as much as it is in West Virginia – yikes!
I’ve experienced this myself as I’ve made various moves across the country.
For instance, l once paid $950 a month to share a bedroom with two others (the room was so small, we had bunk beds). It wasn’t a bad deal for the area, which is one of the most pricey in the United States. A few years later, and a few states over, I rented an entire two bedroom two bathroom townhome for the same amount (no roommates, no bunk beds). It was probably six times the size of that first little apartment, and in one of the most expensive counties in that state to boot. Of course, what I should have done was rent out the second bedroom for a little extra income, but I’ll fall back on the excuse that I didn’t know about financial independence then.
When I finished grad school and began applying for jobs, I had started to think about early retirement, so the cost of living was one of my top considerations. Although I could have made more money if I moved to a place like San Francisco or New York City, a few quick calculations proved that the salary differential didn’t nearly offset the higher costs I’d face.
The graph to the right shows the median home price, in blue, and the median household income, in red. If you’re spending four times as much on a home, you’d hope to be making four times as much money. Obviously, that’s not the case – not even close.
The Cost of Other Living Expenses
Home prices aren’t the only expenses that fluctuate across the country. There are also transport costs, like tolls and the price of gas. A few years ago I drove across country, and one of the most eye-opening parts of the trip was toll costs. In the Northeast, I couldn’t seem to escape tolls, and one day I spent more than $20 on them. As I traveled out west, they became less and less frequent, until they stopped entirely. If you live near a toll road, try to avoid it using alternate routes. If it’s unavoidable, factor it into your monthly expenses and consider if you could save money by living elsewhere.
Another major expense is power. Living in a state with extreme weather means you’ll pay more for heat or air conditioning than if you were to live in a place with more mild weather. The bigger your home, the more you’ll spend to heat or cool it. There’s also insurance. People who live in areas with higher risk of natural disasters like hurricanes and tornadoes either need to pay for additional insurance, or risk losing everything.
Even the cost of groceries becomes more expensive as you get further from major cities or truck routes.
What You Can Do About It
You can move – to another city, state, or even another country! I know that’s easy for me to say and undoubtedly difficult for you to do, whether it be because of family, work, or other commitments. Ultimately, though, I’d encourage everyone to consider it, because it could lead to years of extra retirement thanks to the money you’ll save.
As a less extreme measure, you can also save money by moving within your current city. You could downsize to a smaller home, or move to a more affordable suburb. This year when my lease was up for renewal, I explored other available properties in my city. I ultimately decided to stay put, because I was paying the most competitive price in my area, but it’s an exercise I’ll go through again every year just to be sure.
If you’re already thinking of moving, you should absolutely research the cost of living before making any definite plans. It doesn’t take long, and the savings can be enormous. A little reminder: Always make sure you factor in moving costs to your calculations, and ensure they’ll be offset by what you expect to save.
As I mentioned, the cost of living was a top consideration for me after grad school, and I now live in a city where rent is affordable, and my power bill is low thanks to moderate temperatures. I’m also near a major airport, which is important given my love of travel, because it means airfares are competitive. However, my job is one of the major things keeping me here, and once I’m financially independent I may take the opportunity to move somewhere with lower property taxes (a beach wouldn’t hurt either).
You might decide that living in an expensive area is worth it. Maybe you wouldn’t be able to find work if you moved because your field is specialized, and your salary is high enough to cover all of your expenses and still save a substantial amount.
However, I think it’s important to know how much you spend and how that compares to what you could be spending if you lived somewhere cheaper. Is the extra expense really justifiable? For me, the short-term inconvenience of having to move, find a new job and make new friends would be worth the extra years of financial independence.
I’d love to hear from you. Would you consider relocating somewhere with a lower cost of living?