As remote work has become the norm, more salaried workers than ever before are:
- emigrating to warmer climates
- eschewing cramped apartments in favor of houses with yards
- relocating from popular tourist destinations to more accessible satellite cities
Your cost of living will decrease as a result of this method, without affecting your income. It’s known as, “geographic arbitrage,” or “geoarbitrage” by wealth creators.
Geoarbitrage simply refers to increasing your savings by working and earning money in a robust economy, while residing and spending money in a less competitive market.
It can be challenging to put this theory into practice, despite the fact that the financial calculations underlying it are rather simple. In this article, we’ll delve further into geoarbitrage and include factors you should take into account if you decide to engage in one.
What is Geoarbitrage?
Geoarbitrage may appear to be a complex financial concept.
However, the gist is quite straightforward. Geoarbitrage is the act of relocating to a location with a lower cost of living while retaining or increasing your income.
This may be from a:
- full-time job
- self-employment
- investments
- anything else that generates revenue
Coined by Tim Ferriss, the author of The 4-Hour Workweek, the term refers to an acceptance of life, travel, freedom, and leading a life of one’s own choosing.
Geoarbitrage, to put it simply, is the act of moving to a new location in order to reduce your living expenses, save money, and enhance your standard of living.
Imagine earning a New York City salary and relocating to Chiang Mai, Thailand.
You can work for a company with its headquarters in one place and live in a city with a lower cost of living using geoarbitrage. For instance, moving to Mexico City to live and work might increase your monthly savings from $300 to $2,300 if you have a net income of $75,000 in San Francisco.
Types of Geoarbitrage
Geoarbitrage can come in two forms – international and local. Let’s look at them.
1. International geoarbitrage
International geoarbitrage means moving from one country to another.
For example, you can move from the United States to a less expensive country like Portugal or Mexico, while still earning your income from United States.
Due to the power of the dollar when compared to the local currencies to the less expensive country you move to, you can build up wealth faster compared to if you still remained in the United States.
2. Local geoarbitarge
This means relocating from one state (or city) to another within the same country.
You can move from a more expensive state to a less expensive one while keeping your job and income source from the first state.
Sometimes, you may not need to move across state borders, as it can be as simple as moving a few miles down the road to lower your property taxes.
7 Things to Consider When Relocating
Apart from missing your social network and having to start all over again in a new environment, there are several factors to consider when relocating to a new area for financial reasons.
1. Lifestyle
When deciding where to live, the type of lifestyle you would be living is of great importance.
This will determine how fast you are able to settle in your new location. Sometimes, these factors outweigh the financial benefits of relocating. Things to consider include:
- language
- culture
- educational opportunities
- museums
- tourist attractions
- vibe of the town
- how receptive are the people
2. Cost of Living Index
You can compare the cost of living index to the average US household while creating your budget for your new hometown.
With the use of these calculations, you may determine your “FI Number,” or the amount of money you should have saved up in order to cover your cost of living. You can significantly increase or decrease the size of your nest egg by looking into other areas with differing cost of living levels!
3. Taxes
Taxes are the largest household expense.
Moving to a state without income taxes can shave years off your career and bring you financial freedom faster. For example, relocating to Portugal saves you ten years’ worth of taxes through the “Golden Visa” program.
US expats living and working abroad are excluded from up to $100,000 of earned income from US taxation through the Foreign Earned Income Exclusion (FEIE). Locations that offer savings on your taxation are a good choice.
But be careful, you have to consider other factors such as costs of living, housing costs, etc.
4. Health Insurance
Using Healthcare.gov, you may look up costs in your prospective hometown based on your anticipated income level.
If you continue to work for your employer as a W-2 employee (i.e., a telecommuter), you might be allowed to keep your health insurance coverage. When you relocate to a different state, your options may change, so check with your benefits provider to see if there are any coverage concerns.
Platforms like World Nomads offer travel insurance if you’re planning to relocate outside of the United States. Foreign medical care and other services are covered by travel insurance.
5. Housing
When considering new locations, start your search with housing costs because it is typically one of the biggest expenses in a household budget.
Prior to moving, comparing home costs is now simple thanks to websites like Zillow. You can find the ideal home arrangement within your new budget by using these web services.
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6. Transportation
Transportation costs make up a chunk of our daily expenses. This is why you have to factor in the costs of moving about town when considering locations to move to. If you are unsure of how to go about this, ask yourself the following questions:
- Are cars required there? Or perhaps you could relocate to a neighborhood where you could eliminate this expense totally.
- Are there direct flights or you will have to change planes at a major airport to visit relatives or go on business or vacation?
- Is there reliable public transport available?
- Is there infrastructure for bicycles?
- Do you have to pay tolls on the roads? Your savings from moving can be rapidly wiped out if you add $100/month in commuter tolls.
By designing your lifestyle in your new hometown to minimize the use of automobile transportation, you can realize even more savings.
7. College
Families that send their children to college are a group of geoarbitrage users who are rarely cited as a benefit.
Looking for in-state scholarships could result in huge savings, given how widely different state financial aid programs are. For instance, Wyoming’s in-state scholarship program offers substantially more financial aid than those in Florida or Oregon for a student with a comparable academic record.
Consider living close enough to college so that your kids can live and dine at home if you’re moving to a new location with an in-state institution.
Are You Ready for Geoarbitrage? Final Thoughts
After all is said and done, moving to a new city won’t suddenly give you better money-management habits.
If you are undisciplined with your finances, you will still carry this behavior to your new abode. While geoarbitrage may help, your main focus should be practicing money management habits that would enable you to save up more money.
To establish a baseline and develop the habit of tracking expenditures, create a zero-based budget and adhere to it for three to six months. Then, before you even consider moving, make your household budget tighter.
Growing the difference between your recurring expenses and your income is the only method to determine whether a move will be worthwhile. Follow your budget to your next destination when you reach the point where you can no longer be more thrifty or when there are no new ways to stretch a dollar.
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