By Jamie Johnson, WCI Contributor

Geographic arbitrage isn’t for everyone, but it can be a great way for some people to build financial freedom. Lowering your monthly expenses will help your money go further while continuing to build wealth. Let’s look at geographic arbitrage, some pros and cons, and how to make it work for you.

 

What Is Geographic Arbitrage?

Geographic arbitrage involves protecting your money by taking advantage of different prices in different areas. It’s an idea that became popularized by the FIRE (Financial Independence Retire Early) movement, and remote work has only made it easier.

The amount you pay for housing, healthcare, transportation, and other expenses can vary substantially depending on where you live. For example, I live in Kansas City which has a relatively low cost of living. If I were to move to San Francisco, I would need to earn 80% more money to maintain my current standard of living.

However, the average salary can vary by location as well, and states with a higher cost of living tend to pay higher salaries. Since my cost of living is lower, I’ll likely earn less money living in the Midwest than I would if I lived on the coast. To take advantage of geographic arbitrage, I would earn money in a stronger economy like California and spend that money in an area with a low cost of living. This would allow me to stretch my money even further so I can save more and hit my financial goals faster.

More information here:

Location Independence — What Can YOU Do with It?

 

Pros and Cons of Geographic Abritrage

If your goal is financial freedom and retiring early, there are many advantages of geographic arbitrage. But there are some downsides to consider as well.

 

Pros

  • Low cost of living:
  • Housing: Moving to a more affordable state could put homeownership within reach for more people. For example, the median home price in Kansas City is $457,307, but you’d have to pay more than $1.4 million to find something comparable in San Francisco.
  • Taxes: Another way to save is by moving to a state with no income tax, like Florida or Texas. It’s also a good idea to look for a state with low property taxes.
  • Remote work: Remote work has made it possible for individuals to find competitive jobs that can be completed anywhere. This allows you to take advantage of states that pay higher wages while living in a less expensive state.
 

Cons

  • Hidden costs: Even if a state has an overall low cost of living, there may be hidden costs you weren’t anticipating. For example, Texas doesn’t have any income taxes, but you’ll pay high property taxes. It’s important to do your research so you’ll know what to expect.
  • Possible pay cut: If you can’t find remote work, you may have to take a pay cut by moving. However, making less money could be worth it if you can still save a significant amount.
  • Loss of friends and family: One of the biggest downsides of geographic arbitrage is that it could require you to move away from your friends and family. This tradeoff may not be worth it for some people.

More information here:

Unleashing the Power of Your Income

 

How to Get Started

If you’re considering geographic arbitrage, here are the steps you’ll take to get started.

 

Choose a Location

The first step is to choose a location since this will help you determine how much money you’ll need to have saved first. Spend time researching the various costs associated with the location to which you’re moving.

Also, make sure you choose a location where you’ll actually enjoy living. Otherwise, you risk being miserable or giving up on your plan after you move, which could end up costing you more money in the long run.

 

Come Up with a Plan

You may want to speak to a financial advisor who can help you come up with a financial plan before you move. Come up with a plan to save for the move and help you adjust during the first few months in your new home.

Also, get specific about how much you want to save each month by moving. Coming up with a financial target ahead of time will help you avoid lifestyle creep and stay on track toward your goals.

 

Plan and Execute the Move

There’s a lot that goes into planning and executing a move, so start by deciding whether you’ll DIY the move or hire full-service movers. Moving yourself to another state is possible and it can help you save money, but you’ll need to ensure you know how to properly pack and ship your items so they aren’t damaged.

If you plan to hire movers, spend some time researching the best long-distance moving companies. You’ll also need to come up with a plan for what you’ll do with any pets during the move.

Once you’re settled in your new location, it’s time to focus on getting your paperwork in order. You’ll need to update your billing address, update your voting registration, and get a new driver’s license. From there, you can focus on getting acclimated in your new home and environment.

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