Living in a low cost state is what helped us get to F.I.
Location, Location, Location. Where you choose to live impacts your Cost of Living.
Everyone talks about the impact of the cost of living AFTER you retire.
I wonder how many people think about the impact of living in a low cost state BEFORE they retire?
There are two parts to the equation involved. Being a beancounter I always look at revenue and expense while at work. In the personal world, this is your income (salary or self employment income) and expenses. When your top line (revenue/salary) is higher than your expenses, your bottom line is positive – which is good.
Your path to F.I. certainly can be quicker the higher the salary you have. Not true all the time and here is why. I have friends that make great salaries (North of six figures), however, they then turn around and spend it on sustaining their lifestyle, putting a little away for investments/retirement. The key is not always having a high salary – its how you spend against that.
Anyway, back to the topic of living in a low cost state. Expenses do contribute to the overall achievement of reaching F.I. So managing those expenses is something you need to do. Let me give you some ideas about how I approached this.
First. When I graduated college I had no desire to move back to the East Coast. While all my close friends growing up were there, I just had no rational reason to go back. My immediate family is scattered to the four corners of the U.S. Close friends I had growing up all went off to different locations. However, the BIGGEST factor was the cost of living – and this was back in the late 80’s/early 90’s no less. I knew the cost of housing (rental or purchase) was crazy high on the East Coast.
My first move after college was into my in-laws basement. Yes, even back in 1989 there were kids living in their parent’s basement. You see, I was the youngest of five kids and my parents moved out on me to retire. Congratulations on your degree son, have a nice life, our mission is accomplished! Thankfully I had a great relationship with my future in-laws (or maybe they felt pity for me – not sure which). So I moved into their basement for about 7 months rent free while I did temporary work.
Now when I landed my first job I literally just accepted the offer since I just needed a job. I did not care too much about salary and did not even think about benefits. My future wife and I settled in by renting a townhouse and lived on a dual income with no kids (DINKS). We started in the state of Ohio that had an state income tax and where the cost of living was reasonable. During this stage of our lives we really did not focus on things financial.
Then I had an opportunity to relocate after some company purchases and consolidations. We moved to Pittsburgh (yes with an “h”) in Western Pennsylvania where the cost of living continued to be reasonable. We bought our second house during this time and lived the stereotypical suburban life style. One thing I do very distinctly remember is that where we bought the house was influenced by real estate tax rates AND also the County it was in. We were next to a major city/county that was spending hundreds of millions on professional sport stadiums and I specifically avoided the City/County limits to avoid paying MORE taxes for those stadiums!
After being in this area for five years I had another opportunity to relocate and move up. With this move, like the last, my salary grew (growing the top line!). We had two kids by this time and went to one income (SIKS – Single Income with Kids). The state we moved to is Texas. The cost of living in the area of Texas we live is low.
While we house searched in Texas we noticed that we could ‘technically’ afford a house that has twice the square footage we had before – but we choose not to. Living nice but not living large. We bought a reasonable house for a low cost per square foot (somewhat due to having to move so quick).
The other benefit of Texas is that there is no state income tax. So we went from paying state income taxes to paying none. Somewhat of an offset was that the real estate property taxes are higher in Texas due to the fact that this is the primary way government entities get their income. The sales tax also came into play but I think when comparing before and after, this was about an ‘even Steven’ trade off.
Another benefit is that the cost of fuel is typically cheaper in Texas than other places in the U.S. This obviously is impacted by the price per barrel of oil that is publicly traded but people tend to forget that maybe 25% to 33% (or more) of the cost per gallon of gas is for government taxes and fees. The State of Texas has less regulation and less State taxes so the overall price is generally lower than other States – especially compared to California or New York.
Then there is the costs of routine products (groceries, staples) and services (auto repairs, haircuts) we have to pay for. Again, in general, the costs for these items in the area we live in are lower than comparable States or even within Texas. This means we can invest/save more or maybe occasionally splurge on something.
How can you look at the cost of living between cities? There are some great cost of living comparison calculators out there on the old innerweb. Nerdwallet or Bankrate are two that you might find handy.
Use these calculators with caution. When I used Nerdwallet I typed in moving from San Fransisco to Dallas it says the cost of living in Dallas is 44% less! Woo-hoo, pack the bags. But scroll down the page and open up the details and do a sanity check on the assumptions. I am not sure gas is as low as $1.86 in Dallas right now (I used GasBuddy to check and they report an average of $2.72).
As you consider where to live, here is a short summary of considerations for you:
1. What is the cost of housing? Rental rates or home prices. Research the trends. Ask locals. Can you share with
others to split the cost?
2. What is going to be the cost of housing maintenance? Remember – if you buy you need to maintain and owning a
home is not cheap! This needs to include the cost of real property taxes.
3. What state, city or county taxes are there? Look into it, you may be surprised.
4. What are the costs of everyday staples like gas, groceries, electricity, etc.?
5. Do you have family or friends in the town you are moving to? Maybe they can baby sit if you have kids or provide
6. What is the cost of actually moving and will your company pay for it? BEFORE you move -downsize. No sense
moving that stuff you have not used in 5 years.