Move, Save Money, Become a Multiple Millionaire -- All in One Step

Last month I wrote several posts on what I consider to be a great money saving tip: moving to a lower cost-of-living city. My thoughts were detailed on the following posts:

• Yes, Moving to a Cheaper Cost-of-Living City Can Make You Rich

• How Moving to a Cheaper Cost-of-Living City Can Make You Rich

• 8 Cheap Places You'd Want to Live (And How to Find More)

• Top Jobs: Where the 6-Figure Jobs Are

Now, I'm fine with people living in higher-priced cities. Really, I am. That's a choice those people make for various reasons (what the city has to offer, family/friends live there too, specific occupation that can ONLY be done in that city -- which I don't buy, BTW, etc.) The net is, people make their own money decisions and have to live with them, and I'm cool with that. To show how cool I am with that, I posted How to Save Money While Living in a Big, Expensive City. See, I got off the "move" wagon for at least one post! ;-)

But what I don't buy is the "Yeah, I live in an expensive place but I also make much more money, so I'm doing just as well" argument/excuse. The truth is, yes, you may make more, but your cost-of-living is far higher than the extra amount you make in a high-priced city. Don't believe me? Then consider this piece from Money that lists the pay differences for the same job in different cities:

Pay Differences in 10 Cities (for two jobs, one paying $60,000 a year and another paying $90,000)

• National median: $60,000 -- $90,000
• San Francisco: $72,720 -- $100,890
• New York: $71,100 -- $102,060
• Los Angeles: $66,060 -- $96,390
• Chicago: $65,100 -- $94,680
• Wash., D.C.: $63,540 -- $94,590
• Houston: $62,640 -- $90,720
• Denver: $61,920 -- $88,200
• Atlanta: $61,860 -- $91,350
• Miami: $60,960 -- $88,560
• Milwaukee: $59,040 -- $89,100

Then, Money adds this comment which is exactly what I'm talking about:

Of course, in theory, a higher salary in one city may be expected to afford the job-holder the same quality of life as she could expect in the same position in a less expensive city. But it often doesn't due to the effect of taxes and local inflation rates.

To put some numbers to this thought, I did my own analysis to determine which was better -- a high-paying job in a high cost-of-living city or a lower-paying job on a low cost-of-living city. I did this by doing the following:

• I went to Sperling's Best Places and typed in each city.

• I clicked on the cost-of-living link for each city which gave me an index of how the city compared to the national average in costs.

• From there, I adjusted the national median salary of $60,000 (I didn't do this analysis for the $90,000 a year job) to what it would need to be to break even in each city.

• I then subtracted what the person needed to earn (based on costs) from what they do earn (based on the salaries above) to see if they were ahead or behind financially by living in that city.

I know, it sounds confusing. So let's do an example. Here's what I did for San Francisco (SF):

• Sperling's says that SF indexes at 207.7 versus the U.S. average of 100.0

• This means, someone in SF needs to earn $124,620 (2.077 * $60,000) to earn as much as the $60,000 median national average salary

• But the average SF employee for this same job on earns $72,720.

• Hence, someone living in SF, though he makes almost $13,000 a year more, is actually down $51,900 ($124,620 - $72,720) versus the average U.S. worker.

Now that you know what I did, here are the numbers for all the cities, ranked from the best to the worst:

• Houston: $13,620
• Milwaukee: $5,760
• Atlanta: $4,500
• Denver: -$5,760
• Chicago: -$18,480
• Wash., D.C.: -$18,900
• Miami: -$20,760
• Los Angeles: -$26,280
• New York: -$32,280
• San Francisco: -$51,900

So, let's see what these numbers say:

• Houston is the winner if you're looking to maximize your income-to-cost ratio. Versus the national average, you're $13,620 per year better off by living in Houston.

• SF is the loser. You're $51,900 worse off versus the national average by living in San Francisco.

• Now, think what would happen if you moved from SF to Houston with the same $60,000 national median salary job. This means you'd go from a salary in SF of $72,720 to a salary in Houston of $62,640 (more than a $10k cut in pay) but because of the cost of living in each city, you're $65,520 better off each year!!!! Now, take that over 30 years at a 8% return and it's $7.4 million!

Ok, numbers can lie (a bit), so let's cut that in half -- you still have $3.7 million more! Is it REALLY worth that much to live in an expensive city?

Now, what if you could switch to a lower cost market and keep the same salary like this guy (read all the way through) Then you'd REALLY be in the money! ;-)

Comments

[SFNative]

Well, in theory you *may* be right, but real life speaks volumes. I live in SF and know I have a much better quality of life (and more money in the bank) than if I lived in Houston. While housing prices are very expensive, you do not need a car to live here. That alone saves hundreds of thousands of dollars over your lifetime. No car (or two or three), no insurance, no gas, no maintenence. Public transportation is superb here --something you only get in NYC or Chicago. Every other city and suburb FORCES you to own a car.

I happen to work in an industry where I could work anywhere, but I choose to live here. The air is cleaner, the property taxes and utility bills are certainly lower than Houston, I don't have to own a car, the people are diverse, and it's a beautiful setting. Carmel, the Wine Country, Big Sur, etc. are all less than two hours away. It's a no-brainer.

[FMF]

You may have a life you prefer, but there's no denying that it's much more expensive to live in SF than in Houston.

Yes, there are some savings, but you need a lot more than the ones mentioned to overcome the price of real estate, tax rates, and costs of basic items that are much, much higher in SF.

But what's the big deal anyway? That's your choice, which is fine for you. But as a reasonable, thinking adult, you must admit that your choice of cities IS more expensive than most other alternatives.

[HC]

I have friends in Houston. I've been there a number of times. There's a lot to like about the city.

But I suspect the relatively high salaries there also include a premium for dealing with the highways, which are insane, and the heat, which is even worse. (And my area isn't exactly zephyr breezes in the summer to begin with.)

Also, I can assure you that there are fields in which the vast majority of the work is done in large metro areas. My job happens to be one of them, and if I were to move to one of the three(?) other cities with any depth of employment, I'd actually be moving to a higher cost-of-living area, rather than the reverse. I hope this doesn't sound defensive, because I know I pay more to live here and accepted that long ago. But this job and this town go together.

[Lord]

I would just point out that if you are going to move to a less expensive city, you must first live in a more expensive one. For this reason I would recommend starting out in the most expensive one you prefer and, after building your career, then moving to a less expensive one. You can frequently keep your higher pay as well as have lower costs. Unless you decide you can't live anywhere else, that is.

[Lazy Man and Money]

I just made the move from Boston to San Francisco. In the move, I got an immediate 25% raise that I couldn't get in Boston and should have gotten about 15% more (according to many sources), but I wanted to begin work quickly and not wait the optimum offer.

Furthermore, my fiance's housing allowance (military) nearly doubled and it's tax free. That increase alone is enough to pay for our rent in full - (Housing is actually the same).

I think San Francisco's rating is a little over done. I think it makes the assumption that you buy a home or something. There's a vast disparity between the buying and the renting here. I know that all the other costs of living are pretty standard. They aren't even much more than mid-west when I was there - maybe about 10% if that.

[tiredbuthappy]

Dear FMF,

I hate you. Hate! This post could have been written to specifically shatter all my dreams. It's almost eery. My annual household income is almost exactly $60,000. I live in a very affordable city (Philadelphia). And I desperately want to move to the SF Bay Area. I keep telling my spouse that our salaries would be 50% higher there so the decrease in our quality of life wouldn't be too bad. He's been skeptical about that for a long time. Seems he was right.

Grrr. Thanks for nothing.

But what a great post.

[LivingAlmostLarge]

Awesome post. I really wish more people would think about lower COLA. DH and I are dying to move to a cheaper area. We are hoping to move somewhere lower than where we live. I know that if we do, we'll be so much better off. Our fixed costs will be lower. And so we able to save more because of it! Cheers.

[m]

Totally agree with Lazy Man. In the SF Bay Area cost of living is not bad if you rent, and with the salaries here being some of the highest in the nation, you can do quite well. When it comes to buying a home in this market, now that is a different story, but overall these numbers don't seen to take into account the numerous lifestyles possible in this area. You can live very cheaply here, esp. with a roommate and enjoy a very high quality of life due to the natural beauty, cultural resources, public transportation, and high salary.

The cost of food and other expenses are similar to other places; there are all sorts of free activities for entertainment and recreation that you may not have access to in many cheaper places; and it's much easier to find more creative (and thus cheaper) living situations here than in some other areas.

For example, we found cheaper rent here than when we lived in a suburban area on the East Coast that is considered to have much cheaper cost of living that the Bay Area. There, we paid more for space we didn't need, because we couldn't find anything suitable for us that wasn't too big. Here there is much more variety in available housing and our rent went down by finding a smaller place that was right for us while our salaries increased and we did much better overall.

I think all those stats might make sense if you are buying a home, but not if you rent. For ex. research I did on our fields in Austin show our rent would be hardly cheaper but our salaries would be significantly lower and with far fewer jobs to choose from. So though cost of living in supposedly lower according to the stats in reality it would be a bad move for us financially, unless we intended to buy there.

[NolikeLiberals]

Average Housing costs of Houston and SF according to http://www.bestplaces.net.
Houston 115k
SF 750k

Cost of living looks the same to me - NOT!

Most people don't want to rent nor have a "roommate". However, that's obviously not the case for SF people.

[JACK]

This analysis, while useful, it is not infallable.

I could have lived in city A and made Y dollars or I could have lived in city B and made Y+50 dollars. City B had an on average 33% higher cost of living.

Now those are dramatic numbers, but the point is this: don't compare the averages, compare what you will actually do. Because, like it or not, you can't save more than your salary. So an absolute dollar advantage does have its advantages. And I just didn't plunk myself down anywhere in City B. I didn't just randomly walk into 33% higher cost of living. I chose my neighborhood and my home and other things on the basis of being able to live on less than what the cost of living suggests I should be able to do. This clearly doesn't work for everyone. But when you are offered an absolute (not relative) dollar difference, it's worth asking whether you could live in a way (given that city's costs) that allows you to take advantage of it.