Living in an expensive city has been the main way for millions to get ahead for decades. After all, most of the high paying jobs are all in expensive cities, which is why they are expensive in the first place!
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 types of cities for extended periods of time. In my experience, I’ve seen massive fortunes made in multiple ways.
If you want to “get lucky,” then you might as well go where there’s the most opportunity in an expensive city. Because twiddling your thumbs in a dying town, complaining why you can’t get ahead doesn’t make sense. We live in a free country with no state border controls.
Expensive Cities Have The Most Opportunity
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 still around $4,300 a month in 2020. But the only reason why rent is $4,300 a month is because incomes are high enough to afford such levels! If there weren’t, rent would be cheaper.
Seriously, 22-year-old college graduates are getting compensation packages of between $120,000 – $150,000 at big tech firms. By the time these graduates are 30 years old, they will likely be earning in excessive of $300,000. Then if two of them shack up, we’re now talking a $600,000+ household income thanks to living in a big expensive city.
Further, now there’s a global pandemic, the argument is that people want to live in less densely populated cities. I get it. However, the biggest career, money-making, and networking opportunities will remain in big cities. It’s just a law of numbers and opportunities.
Only if you are already established in your career or business will big city living be less effective for you. In this case, you may want to get away because too many people are asking you for help.
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. And that’s my point. Even though I can relocate to the middle of nowhere, the opportunities are too endless to leave San Francisco.
Living Expensively Makes Everything Ironically 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 More 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.
An Experience In Angor Wat, Cambodia
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!
Traveling Internationally Will Make You A Better Person
I swear to you, such random international observations will change you for the better. Here are some examples as to why international travel will help you:
* 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 $1.6 million. Sounds expensive right? Not so if you analyze what everything else costs compared to your place.
- $32,000 median price car = only 2% of the total cost of the house or 10% of a $300,000 gross income.
- $30,000 bathroom creation = only 2% of the total cost of the house.
- $25,000 annual tuition for college = just 35% 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% of the annual cost of owning the house.
- $150 nightly hotel cost = only 2.5% of the monthly cost of owning the house.
Why Living In A Cheap City Can Be Costly
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).
Well That’s Just Silly
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 over $1,600,000 in San Francisco in 2020 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 $1.6 million house within 30 years through forced savings, you’ll end up with at least $1,400,000 in cash after commission and taxes. With the $1,400,000 in cash, you could then buy that $300,000 house in Ohio. Then you can retire in style because you’ve still got $1,100,000 in your pocket!
Just look at how strongly the NASDAQ has performed during the 2020 pandemic. It’s up over 25% as of 2H2020. The concentration of wealth is getting more concentrated.
It’s Easy To Save Living In A Big City
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.
But guess what? Thanks to the work from home trend, commuting is no longer as big of a deal. As a result, many big city residents are smartly finding cheaper areas in the city to live. Buying property in or near your city that’s a little further out is probably the best near-term real estate buying opportunity.
Before uprooting your family from a big city where you’ve spent years building your network, you will first look around your city to save. There’s no need to relocate to Des Moines, Iowa immediately when you can save 20% – 40% relocating with your city. That’s what I did in 2014 to save 40% and haven’t looked back.
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.
our 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 to generate more income. From this extra activity comes a stronger work ethic. You’ll gain 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. However, 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.
What About Happpiness?
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. 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. He or she 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!
Wealth Building Recommendations
Invest in the heartland of America. Although I’m a proponent of big city living to make the most amount of money possible, there is definitely a demographic shift towards lower cost states and cities. The internet and the pandemic have enable this shift to accelerate.
As a result, I think investing in real estate across lower cost areas of the country is a smart idea. The investment trend should be multiple decades long. The easiest way to invest these cities is through CrowdStreet and Fundrise. These are the best real estate crowdfunding platforms that thoroughly screen their deals. Both are free to sign up and explore.
I’ve personally invested $810,000 in the heartland through real estate crowdfunding while also investing in San Francisco real estate.
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Those who are on top of their finances build much greater wealth longer term than those who don’t. I’ve used Personal Capital since 2012. It’s the best free financial app out there to manage your money.
Updated for 2020 and beyond.