Following Content Also Features as a Guest Blog Post from Prudent Plastic Surgeon.
Geographic arbitrage is the concept that you can shelter your money and increase wealth quicker by living in a city/region with lower expenses – usually in the form of lower taxes or cost of living. Basically, your dollar will stretch further in a more geographically arbitraged location.
The premise of geographic arbitrage as a whole makes sense
If you have the same amount of money, but pay less for goods, services, and taxes, you will have more money to save, invest, and build wealth.
Obviously, your behavior will play an even more important role, regardless of geographic location. A physician making $300,000 in San Fransisco may be a prodigious saver and accumulator of wealth, live frugally, and retire early. A different physician living in Boise also making $300,000 annually may spend her money on fancy toys, be an under accumulator of wealth, and have to work many extra years because she didn’t save for retirement.
This is why it is pretty much impossible to determine the geographic regions that physicians or other high income professionals do the best and the worst. Ultimately, it comes down to behavior. No matter where you live, you absolutely can achieve financial well-being and freedom.
So, is geographic arbitrage worth pursuing?
The point of this article is not to argue whether geographic arbitrage works or not.
If you take the same person, the same salary, the same financial behaviors and tendencies, living in a location with less taxes and lower cost of living will accelerate wealth building.
The question that I am seeking to answer though is whether geographic arbitrage is worth pursuing for the average physician?
I’ll use myself as an example
In July 2020, I graduated after 7 years of training in plastic surgery and microsurgery. For those 7 years, I lived in New York City…in Manhattan to be exact.
According to Numbeo, New York City has the highest cost of living (COL) out of any city in North America. Its COL index is 100.
In my last year of training in New York City, our annual pre-tax income (married filing jointly) was $87,130. This does seem like a lot for a resident, but remember that I was a PGY-7 and the ACGME salaries for residents in NYC are increased to account for some of the cost of living.
After training, my wife, two boys, and I moved to Buffalo, NY. Buffalo has a COL index of 71.18, good for 47th place in North America.
Our annual pre-tax salary (not including bonuses) after moving to Buffalo increased by 503%. Meanwhile, as described above, our cost of living index dropped by 28.82%.
How our lives changed with geographic arbitrage
It may seem like most of the increase in our “wealth building power” came from our increase in salary (+503%) compared to the decrease in cost of living (-28.82%). But keep in mind that the units for salary is dollars ($) while the index is an arbitrary unit. So it’s not exactly comparing apples to apples.
Let’s see what happens when I compare some of our expenses from our last year in NYC to our first year in Buffalo
First, some quick points of reference:
- For simplicity, I am not taking taxes into consideration. We are in the same high-tax state (NY) but obviously in a higher tax bracket now. We also no longer have to pay NYC taxes, however.
- I can’t directly compare the proportion of money invested in these two time periods. As you’ll recall, I had terrible financial habits as a trainee. I spent up to my paycheck and didn’t invest. So even, if I only invested $1 this year, the increase would be infinity.
In NYC, we paid $3350/month for a two bedroom apartment that I will generously say was 900 square feet. Thus, we paid 44.8% of our PRE-TAX income each month on housing. This apartment was “subsidized” by my training institution so I basically just handed back half of every paycheck to them.
In Buffalo, we pay $3031/month for our mortgage on a four bedroom, 4500+ square foot house. If I include principal, interest, taxes, and insurance, we now pay 9.6% of our pre-tax monthly income on housing.
But please keep in mind, the only reason that we bought a house instead of rented is because we found one that:
- Met all of our criteria,
- Was less than 2x our income,
- Kept our home debt to income ratio less than 20%, and
- We planned to stay in it for at least 10 years
If we had not found such a house, we planned to rent, which I think is the more generalizable and smart advice. Especially if moving to a new city and starting a new job.
In NYC, we paid $1590/month for our oldest son to go to daycare. This rate was also subsidized as it was the hospital daycare. Therefore, we spent 21.9% of our pre-tax income on childcare each month. And this wasn’t even full-time. It was just 3 days a week.
In Buffalo, we have both of our sons in full time daycare as we both work full time. We pay roughly $4011 monthly for both of them. That’s equal to 9.1% of our pre-tax income.
I have to stop right there
Some quick math will show you that, in our last year in NYC, 66.7% of our pre-tax income was going to subsidized housing and childcare. That’s 2/3 of our paycheck every month! Before taxes!
So you can imagine that, after taxes, we didn’t have a lot left over for things like eating out, entertainment, or vacations. Because of this, I can’t really compare those things between the two locations. Anecdotally however, everything is way less expensive in Buffalo.
But, I think we already have a pretty good sense that geographic arbitrage has really helped us. It’s given us the opportunity to increase our wealth to a greater extent compared to if we lived in a higher COL area.
Why geographic arbitrage was right for me
Moving from NYC to Buffalo made sense for a lot of reasons.
We were moving to my hometown. Both my wife and I had job opportunities that we felt were a great match for us personally and professionally. We wanted to move somewhere with access to a city but with ability to live in an area with more space i.e. suburbs.
…and Buffalo would provide significant geographic arbitrage.
If the first list of reasons didn’t exist, would we have moved here?
I don’t think that I can answer that question. But I do know that the decision would not have been so much of a no-brainer.
So, is geographic arbitrage worth it for the average physician?
I fully recognize that a minority of you reading will be in a situation like mine in which personal, professional, and financial factors all line up when selecting a city to settle in or move to.
The question really is: how much is geographic arbitrage worth to you?
You can put some numbers on this.
Let’s say you live in the NYC area (maybe even in New Jersey) and you make $300,000 annually. You live near your family which is great. But the COL is high and you are renting an expensive apartment. You wonder if you should move to Raleigh, North Carolina where a job just came up in which you would also make $300,000.
Well, you know how much your rent is. You can look up the average home price in Raleigh. Calculate the percentage you pay for housing now versus if you lived in Raleigh.
Is that difference worth being further from family? Is it worth the hassle of moving and changing jobs? Do you prioritize being near a big city even if it costs more? Does your partner have family closer to this other city? What is that worth to you both?
I don’t know the answer to these questions. Only you do!
It’s all about priorities
In the end, it comes down to your priorities.
Ultimately, you (and your partner) will have to decide together where geographic arbitrage ranks in your priority list. (Here’s a refresher on getting on the same page financially with your partner.)
Is it for you?
I would say the #1 reason that people stay in a high cost of living area in a job that they may not love is because they are near family. And I get that.
However, I am willing to bet that there are a LOT of physicians out there who could benefit from geographic arbitrage and who may prioritize that, along with other potential personal advantages of moving, but don’t do it. And the reason is that change is scary.
However, if change will put you in a better position to live your best life, then I say go for it!
I do understand that geographic arbitrage will not be for everyone however, so here are some other ways to accelerate your wealth building immediately:
- Pick up a side gig
- Develop the habits that create financial success
- Increase your net worth in 5 simple steps
- Invest in real estate using our guide!
Blog Post Excerpt from Prudent Plastic Surgeon.