When asked about career advice, I always recommend people just follow the money. New York City has all the financial firms. San Francisco has all the tech, internet, and venture capital money. While Washington DC and the surrounding suburbs have all of our tax money to spend on massive government contracts!
I’ve lived in all three areas for extended periods of time, and I’ve seen massive fortunes made in multiple ways. If you want to “get lucky,” then you might as well go where there’s opportunity. Because twiddling your thumbs in a dying town, complaining why you can’t get ahead doesn’t make sense when you live in a free country with no state border controls.
The biggest push back I get for my “follow the money” advice is that such places are just so damn expensive. It is absurd that the median rent in San Francisco is now around $4,000 a month. But the only reason why rent is $4,000 a month is because incomes are high enough to afford such levels! If there weren’t, rent would fall.
The market is efficient. Capital is fluid. Everything is rational. Only an idiot with an online business would NOT try and geo-arbitrage his way to a lower cost area of the world. Oh wait, that’s me.
LIVING EXPENSIVELY MAKES EVERYTHING CHEAPER
If you live in the most expensive city in the world, then you’ve only got upside in terms of savings when it’s time to visit somewhere else. Everybody’s happiness meter ticks up when they’re saving money. When I proposed my Adjusted NHER™ formula for figuring out how much to spend on a hotel room when traveling internationally, Financial Samurai readers from the Midwest smartly pointed out that my Adjusted NHER© formula won’t work for them given their cost of living is so low .
One reader comments,
“I am in a West-side (read: less expensive) suburb of Cincinnati and my NHER© works out to about $28.00/day. If I booked a hotel at that price, I’d have to bring my own sheets, mattress and can of Raid.”
This simple, yet insightful comment got me thinking along several lines:
* We live in the richest country in the world where the cost of living can also be so cheap.
* Perhaps one reason why so many Americans don’t have passports (110 million out of a 320+ million population) is because with low NHERs©, many feel it is relatively expensive to travel overseas? Even if you are wealthy and have a low NHER©, your propensity to travel abroad may be negatively affected.
* Living cheaply due to circumstance or because you choose to actually makes everything else much more expensive.
* If you choose to live in an expensive city, not only will you have a high NHER©, but you’ll have more opportunities to make more money.
SOLVING A MYOPIC PROBLEM THROUGH TRAVEL
One of the reasons why so many countries despise Americans is because we think everything should revolve around us. It’s totally logical for us to expect everybody to speak English in America, but when we still expect everyone to speak English when we travel abroad, and get frustrated when they don’t, we’re a bunch of self-centered donkeys who lack culture and respect!
I firmly believe that if the government imposed a mandatory travel abroad year for every single American before the age of 21 (subsidies for those whose families earn below a certain amount), there would be less wars and even more productivity in America due to a greater appreciation of how good we’ve got it.
Once you’ve traveled abroad to much poorer countries, you’ll realize how hilarious it is for privileged Americans to complain how lucky other people are in America.
I was sleeping in the van on the way back from Banteay Srey temple to my hotel in Siem Riep when I glimpsed outside the window and saw some kids walking in 100 degree heat on the side of the road. I asked the driver where they were going, and they said they were walking home from school several kilometers away! At least they were giggling as they soldiered home.
Spend 10 minutes under the blazing Cambodian sun, and you will experience such oppressive heat that you’ll think you’re a vampire whose skin is burning. Now spend an hour walking in one direction and realize how good you had it growing up. My story of feeling embarrassed biking to school at age 16 when all my friends had cars is so trivial. At least I had a bike!
I swear to you such random international observations will change you for the better. Here are some examples:
* You’ll no longer complain about the AC going out at the gym, at work, or at home.
* You’ll no longer complain about having a shitty bike, or a crappy car.
* You’ll no longer complain or be embarrassed about riding the bus.
* You’ll cherish what you have longer.
* You’ll stop whining about long work hours as it’s unlikely that no matter how hard these kids try, they will never be as fortunate as you.
* You’ll think twice about gorging yourself with so much food at one meal that might somewhere else feed a family of five.
* You’ll naturally be much fitter because you’ll be more mindful of how little other people have to eat.
* You’ll stop wasting money on stupid crap, which after a short period of time you’ll no longer use.
* You’ll try harder to make the most of your situation because you’ll be reminded that not everybody is as lucky as you.
* You’ll stop thinking that everybody else is privileged and lucky because you’re already so much luckier than so many other people already.
* You’ll begin to focus on how you can better yourself, rather than try and bring someone else down to your level.
* You’ll empathize more with people who are less fortunate.
HOW LIVING IN AN EXPENSIVE CITY MAKES THINGS CHEAPER
Let’s say you own and live in an average San Francisco home that costs $1.2 million. Sounds expensive right? Not so if you analyze what everything else costs compared to your place.
* $32,000 median price car = only 2.7% of the total cost of the house or 10.7% of a $300,000 gross income.
* $30,000 bathroom creation = only 2.5% of the total cost of the house.
* $25,000 annual tuition for college = just 38% of the annual cost ($66,000 for mortgage, property tax, insurance, maintenance) of owning the house.
* $1,500 round-trip economy class ticket to Asia = just 2.2% of the annual cost of owning the house.
* $150 nightly hotel cost = only 2.7% of the monthly cost of owning the house.
Let’s say you live in Cincinnati, Ohio in a $300,000 house. Pretty cheap right? Not really if we start to make the same cost comparisons.
* $32,000 median price car = 10.7% of the total cost of the house or 42.7% of a $75,000 gross income if we are to keep the ratio of gross income:housing cost the same at 1:4.
* $30,000 bathroom construction = 10% of the total cost of the $300,000 house.
* $25,000 annual tuition = 167% of the annual cost of owning the house ($15,000 for mortgage, property tax, insurance, maintenance).
* $1,500 round-trip economy class ticket to Asia = 10% of the annual cost of owning the house, and 120% the monthly cost ($1,250).
* $150 nightly hotel cost = 12% the monthly cost of owning the house ($1,250).
I know what some of you who are living in inexpensive places are thinking. What kind of stupid logic is it to spend lots of money on housing in order to feel like you’re saving money on everything else?! I hear you. But don’t forget. The reason why a median priced home costs $1,200,000 in San Francisco is because there are plenty of jobs that pay healthy six figure incomes. For example, the median income for a 29 year old MBA graduate from Berkeley, Stanford, Columbia, UCLA, and Harvard is around $150,000 all in. Add two of these graduates together and we’re at $300,000. Fast forward five years, and it’s likely they are making $200,000+ each. It’s much rarer to find $150,000 – $500,000 a year jobs in smaller cities.
Furthermore, if you end up paying off your $1.2 million house within 30 years through forced savings, you’ll end up with at least $1,000,000 in cash after commission and taxes. With the $1 million in cash, you could then buy that $300,000 house in Ohio, and retire in style because you’ve still got $700,000 in your pocket!
Believe it or not, there are many ways to save money while living in an expensive area. You can shack up with multiple roommates, find a rent-controlled apartment, or live a little further away from downtown.
For example, just seven miles west of downtown San Francisco, you can rent a single family home in the Outer Sunset for $2,700 a month. That single family home can comfortably house three people, each paying $900 a month in rent. The sacrifice? A 45-60 minute commute compared to a 15 minute commute three miles west renting a similar home for $7,000 a month.
Finally, even though housing and other expenses might take up a greater percentage of your income living in an expensive city, you’ll have a larger absolute dollar value amount to save and invest. Your wealth will end up compounding much greater over time. Example: $20,000 net income, $5,000 housing cost = 25% of net income to housing and $15,000 left to invest vs. $5,000 net income, $500 housing cost = 10% of net income to housing and $4,500 left to invest.
START LIFE EXPENSIVELY
One reason baseball players swing two bats at a time before going up to the plate is because it makes swinging with one bat easier. They’ll be able to swing faster and with more force.
If you start life, or live your life in an expensive city, out of necessity you’ll learn how to become frugal. Read all the comments in the linked post on how everybody saves in NYC while making less than six figures a year. Resourcefulness is a valuable life skill!
Living in an expensive city might even propel you to start a side business or moonlight in order to generate more income. From this extra activity comes a stronger work ethic and a lot more knowledge that could very well open doors to exciting new things.
I’m sure people who live in inexpensive areas also feel the pressure to work long hours in order to make as much money as possible, but at the margin, the pressure is much greater in expensive cities. Why else do you think New York City has the reputation of being a pressure cooker? “Live in New York City once, but leave before it makes you hard,” says the sunscreen speech.
And what about my assertion that living in an expensive city will make you happier? Well, for one thing, you’ll meet a lot more diversified people who will delight your mind with new perspectives. Having attended international schools growing up, I can attest that it’s infinitely more pleasurable than attending my homogeneous Northern Virginia suburban high school. Meanwhile, once you travel to another place, you’ll be happier because you’ll feel instantly richer given everything is so much cheaper. My trip to Kuala Lumpur finally made me feel rich with a R3.6:$1 exchange rate.
Living in an expensive place gives you more optionality. It’s kind of like having a timeshare in Kauai. You’re at the top of the pyramid and can trade your timeshare for anywhere else. If you have a timeshare in Topeka, Kansas, you ain’t trading up with anybody!
EARN YOUR WAY TO RICHES
Even if you take the risk to relocate to an expensive city where jobs are plentiful, there are still no guarantees that you will succeed. It’s important to network, hustle, be a good person, and develop desirable skills. Competition will always be fierce.
As a totally rational human being, you are going to make moves that enable you to succeed. You’ll naturally befriend other people with similar interests in your area of expertise. If you stay long enough, you will probably also find the love of your life in your new expensive environment who may also be making a healthy income.
Living in an inexpensive city is like trying to save your way to riches. It’s possible, but there’s only so much money you can save. Living in an expensive city is like trying to earn your way to riches. It’ll take a lot more effort, but the upside is unlimited!
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Updated for 2019 and beyond.