Is Geo-arbitrage a Good Concept?
When it comes to passive income, we often discuss things like increasing cash flow, reducing debt, and reducing spending.
However, there is a growing movement recommending simply moving to an area with a lower cost of living. It's known as "geographic arbitrage" or simply "geo-arbitrage" and makes a lot of sense – on paper anyway. In fact, my good friend Physician on Fire is a huge fan of geographic arbitrage.
It certainly doesn't make sense for everyone, but if you live in a high cost of living area (like me) you have probably checked your finances and wondered if moving to the Midwest is not an option. It's such a bad idea.
Aside from all the buzzwords surrounding this concept, there are a few things to keep in mind. Before we get into that, though, let's take a closer look at what geo-arbitrage means.
What is geo-arbitrage?
Geoarbitrage is a very simple concept popularized by the 4 Hour Week writer Tim Ferris. Basically, you only need to reduce your expenses if you want to "increase" your net income. A major source of expense for many people is their mortgage, their food, the schools their children go to – the cost of living in general.
The term "geo-arbitrage" initially meant moving to another country. Thailand, for example, has a very low cost of living compared to almost any other place on earth.
Today, however, the term is commonly understood to mean simply moving somewhere with a lower cost of living. As long as you kept the same income, your net cash flow would surely increase.
But does it make sense to the average doctor? Of course everyone is different, but there are a few factors to consider.
The fact is, lowering the cost of living is never a bad thing financially. And it definitely works for people who choose to.
For example, the Prudent Plastic Surgeon recently moved from Manhattan to Buffalo, which is a difference big enough that its cost of living index has dropped 28% – certainly nothing to make fun of.
It doesn't have to be a big step either. Crossing state borders can be a huge asset. For example, Florida has no income tax, so your income could go much further without technically changing.
Some people move just a few miles away and benefit from lower property taxes in a new location.
Anyway, the simple fact is that geo-arbitrage is effective – at least when it's done right.
There are many factors
The idea of moving to a new area and increasing net cash flow is certainly enticing to many. But as with anything, there's a lot more to it than that, and it's important to take all costs into account.
For example, how do you usually get to work? If you are currently commuting in your own vehicle, this may not be that much of a problem. However, if you rely on public transportation or ridesharing, changing your commuting habits could eat up the money you could save.
Travel related: Would you have to fly more often if you were to move? Maybe to visit the family or to go on vacation? Are there toll roads to watch out for? This could also have a significant impact on your finances.
Another important aspect is taxes. As I mentioned earlier, there are states with no income tax, which can be a huge benefit. As of this writing, these are Alaska, Washington, Nevada, South Dakota, Wyoming, Texas, Florida, Tennessee, and New Hampshire. I live in a state (California) with a top marginal rate of 12.3%. Not having to pay this tax is the same as an immediate increase.
Of course, if none of these states interest you, it's still important to pay close attention to the taxes of your destination. Income tax, property tax, and various local taxes can ruin the purpose of geo-arbitrage before it begins.
The last thing to think about is school. If you have children, do you switch from a private school to a public school? Or will they be going to college in the next few years? Given the cost of education, this can be the biggest determining factor for parents.
After reading through these factors, you may have noticed that they are somewhat ambiguous – neither for nor for.
This is because all of these factors can have drawbacks when you are looking at an area with higher taxes, more expensive schools, and less convenient transportation.
But if you find a place that is low in taxes, cheaper schools, and centrally located, it might be too good to miss.
Should you do it
It's hard to say whether I would recommend geo-arbitrage in general. I believe if it makes sense to you, your family, and our careers, there is absolutely no reason not to save money by moving to another area.
On the other hand, I can safely say that geo-arbitrage is simply not feasible for the majority of people.
People often talk about it like it's a math problem. If you change X to Y, you'll have a lot more money and a better life. Unfortunately, we all know that there are a lot more factors to consider.
Right now I love where I live. My whole family is here, as is my church. I have to give that up or restore it wherever I move. It is not impossible. My family could move in with me and we could make new friends.
But what is it worth?
We also love the weather here and even during this time when we spend a lot more time indoors, can go cycling almost all year round or even go for a walk on the beach if we want, it was mentally an advantage.
So is there a solution?
I think the key is to find a middle ground. As the prudent plastic surgeon has learned, even moving within the same state can cut your cost of living drastically. That's what I'm thinking about at this point. Hold up the weather, move to an area with a lower cost of living, and stay close enough to my community, family, and friends.
If it's something that could work for you then it would be more than worth it.
Before you even think about geo-arbitrage, the best place to sit is and evaluate your goals. Take into account your financial priorities – all of your investments, income, sideline jobs, and expenses.
If you can benefit significantly from a small to medium cost reduction, geo-arbitrage might be for you. It's about your priorities and the goals you've already achieved. If you decide it isn't for you, you will know exactly why.
The only thing I've glossed over is that the ability to make this change will depend on your revenue streams. Work hard, but convert that active income into passive income quickly. This makes it easier for you to decide whether or not to use geo-arbitrage.
Whatever you choose, it is important to consider all the options and ultimately make the choices that will help you achieve your goals.