Always Check the Cost-of-Living Before Taking a New Job

Most people look at compensation (of course!) before taking a new job -- comparing what they make at their current job versus what they would make in the new one. Some simply compare base salary versus base salary -- big mistake! You need to compare total compensation versus total compensation (base salary, bonus, likelihood on making bonus, 401k match, other benefits, intangibles like commute time, etc.) But that's for another post. What I want to talk about today is something everyone should do and very few, in my experience, actually think about -- comparing the cost-of-living of the new city versus the current one (assuming you're moving to a new area.)

For example, here are some scenarios you might face:

• Total compensation goes up 7%
• Cost-of-living in new city is 7% higher

• Total compensation goes up 3%
• Cost-of-living in new city is 5% lower

• Total compensation goes up 7%
• Cost-of-living in new city is 30% higher

Assuming everything else is equal, which of these makes the most financial sense?

We've talked time and again about how the cost-of-living in a city can make a HUGE difference in your finances, so you MUST check the cost of the new versus the current city. How can you do this? I like the cost-of-living calculator at Sperling's Best Places. It gives you a great feel cost differences.

Now once you have the information, what do you do with it? Here's how I manage the data:

1. I start with wanting to know if the city is at least close to or less than the cost to live in most other places. If it scores 100 or less in the calculator then I know that I'm at least doing better than average compared to the entire population.

2. I then look at the cost of my current city versus the new one. Will my living expenses be going up or down? If going down, I rejoice at the information. If going up, I take the information into consideration and make it part of my response to the potential employer.

For instance, my move from Pittsburgh to Nashville involved a conversation about my need for a higher bump in compensation than normal since it was more expensive to live in Nashville than in Pittsburgh (FYI, I got an additional bump, but not the full amount). When I moved to lower cost-of-living Grand Rapids, the issue was never brought up. :-)

One final tip: check several cost-of-living calculators (you can Google them) to see the differences between them. Sometimes one will give a different result -- potentially in your favor. You can then use this information in your negotiation for additional salary/compensation. My experience is that if the issue is brought up, employers will rarely question either it's source or accuracy (as long as they are at least somewhat valid.)

Comments

[StL Pastor]

Obviously, it depends on what percentage of your income goes to living expenses. If you're making 100,000 a year, and spending 30,000, a 3% raise is 3000$, and a 5% cost of living adjustment is 1500.

[MC]

It also pays to calculate *your* cost of living, rather than relying on the generic COL for a particular area.

For example, if you don't have kids, does it matter that you'd have to pay for a private school in the new area because the local schools are bad? In another example, if you have a large family, you'll spend way higher than a single person to live in an area with expensive family.

[Bad_Brad]

Keep in mind also that a high cost of living also means that you will build up a lot of equity in a home, assuming you are able to make the mortgage payments and assuming there are no more dramatic drops in home prices in your area. With a larger mortgage payment, you will also get a greater deduction on your income taxes (assuming you itemize and assuming your income is not so high that this phases out).

I live in a high cost area and my two mortgages are about $3000 per month. So on the surface, you would say my cost of housing is $3000 per month. On closer inspection, that $3000 breaks down as follows: about $600 to principal, about $2000 interest, and about $400 escrow, which breaks down to about $300 property taxes and less than $100 for insurance. The $600 principal is an addition to my net worth. It is not really a cost. I deduct the $2000 interest and the $300 property taxes on my income tax, and I am in the 25% marginal tax bracket, so that's about $600 off my income tax. So the real cost of the $3000 mortgages is about $1800.

Also, keep in mind that high cost of living areas also probably have more things to do - sports teams, museums, tourist attractions, special events, parks, etc.

I do miss my $700 mortgage payment from when I lived in rural America, but as with almost anything, there are trade-offs.

[MC]

Another thing to consider: The higher salary figure will likely follow you even after you move, as it will become the starting point for your salary negotiation in future job offers.

So it might really be worth it over your entire career to take the high salaried job in an expensive city----unless you're planning on spending the rest of your life in the expensive city.

[Michael]

... lets remember in todays economy that having a job that pays more the UI is better no mater what.