Are you a saver? Maybe even a super saver? If so did you ever think that moving to a city with a higher cost of living may actually be to your advantage? Probably not. Odds are you’ve heard that to save money you need to move out of that expensive city and go somewhere cheaper. I would agree that if you’re able to make the same amount in Memphis, TN as you’re making in New York City you may want to consider a relocation if your only goal is to save as much as possible. Or perhaps that new tech company based in San Francisco says you can work remotely out of your home town of Cleveland but they’ll pay you what they pay local engineers in San Francisco. By all means it would make financial sense to get San Francisco pay but live in Cleveland. The reality is that pay is very different based on where you live. Cities with higher costs of living typically pay more than cities with a lower cost of living. I’ve worked in 4 distinct geographical areas, three of which the companies I worked for provided relocation packages. Because of this I am all too familiar with the pay discrepancies that come from living in different areas, as well as the salary negotiation process.
If you’ve been in the workforce for a couple of years you’ve probably gained some valuable experience. You also are accustomed to a certain lifestyle that your pay provides and it’s one that you wish to at least maintain in any relocation. What doesn’t fluctuate though based on geographical region is the amount of money that you’re allowed to save into retirement accounts. That’s because these accounts are mandated at the federal level. If you’re a super saver and living below your means then read on to see how you might be able to increase your savings by moving to a high cost of living area.
Let’s assume that you’re living in Denver, CO and work as an advertising professional, earning an annual salary of $60,000. You have roommates and are very frugal. Because of this you’re able to max out all of your retirement accounts. Recently you’ve been contacted on LinkedIn regarding a position out of Seattle, WA. You’re skeptical about moving to Seattle, as you’ve heard the cost of living there is getting out of hand, but you would enjoy this new opportunity ( and of course all of the fresh seafood and being so close to the ocean). You quickly go to Nerdwallet.com's cost of living calculator and do a quick cost of living comparison. It tells you that you need to make $78,000 in order to live the same lifestyle there. You relay this message back to the recruiter and, after a couple rounds of negotiations, they make you an offer for exactly $78,000. You’re excited to try the new city but you aren’t anticipating any major lifestyle changes (financially) that are different than how you’re currently living. In reality though, because you’re a super saver, you will be able to realize substantial savings.
To see how this is possible take a look below. These numbers are based on ADP’s annual salary estimates.
In this scenario it’s beneficial that the state of Washington doesn’t have income tax, but as you can see there are substantial savings at the take home pay line at the bottom. You were only spending about $22k in Denver to live life to the fullest. Since Seattle has a 30% higher cost of living you should be expecting to dish out a little over $28k a year to live the same lifestyle. Since your salary was negotiated at the annual salary amount, however, you’re able to take home roughly $8k more a year as pure savings. The 3 factors that will dictate how much you can save are as follows:
1 – The higher initial salary the better. Since your raise is based on your current salary you’d like it to be as high as possible.
2 – How low your annual expenditures are. The less you spend in City A will formulate into how much you’ll have to spend in City B to get by. As an example, a 20% increase on $20,000 of expenses is only $4,000, but a 20% increase of expenses on $50,000 is $10,000, a substantial difference.
3 – The higher the cost of living adjustment the better. Moving from very cheap to very expense will actually be to your advantage. Since you are planning on pocketing some major savings, negotiate for the highest cost of living adjustment as possible.
The plan outlined above assumes that your pay will increase by the cost of living adjustment. Again, the savings are only realized if your income actually does increase by the cost of living change. Let’s look at a more extreme example. Perhaps Warren Buffet’s associate is looking to make the move from Omaha, NE to San Francisco, CA. Since she was mentored by The Oracle of Omaha, however, she is a frugal individual and maxes out all of her retirement accounts. According to Nerd Wallet she will need a cost of living adjustment of an astonishing 90% to survive there. Surely nobody can afford to move to these high cost of living areas, right?! Since she’s making $60,000 in Omaha she presses the recruiter for the raise (otherwise she’ll stay put right where she is!). Luckily the recruiter says that it’s in the cards and they make her an offer of $114k a year. After moving and looking back at her year financially she might see the following:
Even with California’s sky high cost of living and state income tax she’s still able to save an ADDITIONAL $10,753 after maxing out all of her retirement accounts and living a life that is of the same quality as in Omaha.
The truth is that no matter where you live there will be opportunities to save money. If you are looking to relocate to a certain city be sure to try to find a job prior to moving and, if you do get an offer, make sure to negotiate your salary based on the cost of living of both cities. As we saw in the examples above there will be opportunities to increase your take home pay (after savings) no matter the cost of living in both cities. A tip is to focus on the annual salary amount during negotiations if you’re moving to a higher cost of living area but focus on the annual expenditures line if you’re moving to a city with a lower cost of living. Typically when salaries are negotiated during a relocation they are based off of the base salary amount, or top line figure. In reality, as a job candidate, you should be more focused on your take home pay after savings, since this is what you’ll actually be able to spend. Do the math, however, and see which way negotiating is to your advantage.
As an example look at what could happen if you move from a high cost of living area to a lower cost of living area and simply rely on the cost of living adjustment. Because you’re a super saver you’re actually losing out.
In this scenario we assumed that a person was making $55,000 a year living in Charleston, SC and was moving to Charlotte, NC. According to Nerd Wallet there is a 9% cost of living decrease via the relocation. After the relocation you’d hope that your take home pay after savings only decreased by the 9%, but instead it went down a whopping 17%. As a result some of your savings will be required to meet your expenses. This could come as a shock to many, especially to people who are looking to save money by going to a cheaper location.
People often associate lower cost of living areas with higher savings rates. Because it costs less to live a certain lifestyle it MUST be easier to save money, right? It seems logical, unfortunately people aren’t able to earn the wages that they thought they would be able to and instead just end up both making less and also saving less. Live in the Midwest and retire rich seems to be a popular mindset these days. What people don’t understand, however, is that they aren’t leveraging their assets enough by doing this.
Do you think there are more millionaires per capita in Cleveland, OH or San Francisco, CA? How about Washington D.C. or Flint, MI? Well in February of 2017 CNBC released data where they ranked each state based on the number of millionaires per capita. Since the study was done based on per capita it doesn’t matter if the state is highly populated (California) or less populated (Alaska). Take a look below to see the top 5 states by millionaires per capita as well as well as the bottom 5 states (District of Columbia is included). Also take a look at the cost of living rank in each state, where 1 = the most expensive based on data released in 2015.
According to this data it would seem that if you want to save an obscene amount of money, then living in a high cost of living area could actually be the way to go. This data also corroborates the post that I did last week, detailing the average 401(k) balance by state. In the data we saw that states with a higher cost of living tended to have higher average balances than states with a lower cost of living. In the end where you live hopefully doesn’t come down to which location allows you to save a buck or two, but rather which location will give you most of what you want in life.