Geographic Arbitrage: Moving To Reduce Your Cost Of Living

Geographic arbitrage (or geoarbitrage) is a topic highly relevant to people like me who want to make their dollar last longer.

Arbitrage is a concept I first encountered as a business student. Arbitrage means taking advantage of different prices.

Back then, it was often used in connection with interest rates across countries. If you could borrow money in a currency in one country at a low interest rate and put it into a savings account at a higher interest rate in another currency in another country, you would have an arbitrage opportunity. In theory, this should not be possible and is governed by exchange rates (something called the interest rate parity), but that is irrelevant to the topic of this post.

In fact, when it comes to geographic arbitrage it is very possible and many people use it to achieve financial independence faster or retire earlier.

What is geographic arbitrage?

Geographic arbitrage is the concept of using geography as a way to make every dollar worth more. You earn money in a stronger economy and spend them in a weaker economy. This is done by relocating to new geographic areas within your country or even moving to other countries.

Imagine you had $1,000 per month for housing.

How large an apartment do you tihnk you would get in New York City? I bet you would only get a studio – maybe with an en-suite bathroom and perhaps a kitchen if you are lucky.

Now imagine you had $1,000 in Mississipi? Here, I am sure you could get a 3 bedroom, 2 bathroom house at 2,000 square feet (185 square meters) for the same amount.

If you were willing to settle for a studio in Mississipi, you would probably be fine with $500 per month.

Now to the last case. Imagine you had $1,000 for housing in Bali, Indonesia or Thailand? Here, you could probably get a 2-4 bedroom villa with private pool for the same amount.

You see how you can use geography as a lever to make your dollar worth more?

That is the very concept of geographic arbitrage explained through housing examples, but geoarbitrage goes for everything from food, clothes, education etc.

In fact, geographic arbitrage is not only relevant for your cost of living, it is also relevant when looking at salary levels.

Did you notice that I chose examples within a country and across different countries?

That’s because geoarbitrage comes in both intra-national geographic arbitrage and international geographic arbitrage.

Intra-national geographic arbitrage

Intra-national geographic arbitrage is when you move within a country to take advantage of lower prices and/or higher salaries.

Often it is a combination of the two that can make geographic arbitrage interesting.

If we look at the US as an example, you could benefit from moving from a state with high cost of living (e.g. California, New York, Hawaii) to a lower cost of living state (e.g. Oklahoma, Texas, North Carolina).

While doing your research, you should find out what the salary levels are for you occupation in a specific state and compare the two.

If your disposable income increases when fixed and variable living costs are paid, then you have succeeded with geographic arbitrage!

Alternatively, if you already have a sufficient amount of savings, you could be financially independent (and able to retire early) in one state while this might not be the case in another state.

The same goes for other countries if you live in an expensive, urban area, you could move to a less urban area and probably save some money. Sometimes you would be surprised that it doesn’t require moving that far away.

International geographic arbitrage

Within countries, you have some potential to do geographic arbitrage, but it becomes even more significant if you are willing to move to another country with (maybe) a much lower cost of living or higher salary levels.

Take a look at this cost of living map of the world:

If you happen to live in a country with a red, orange or yellow arrow on top, you have great potential to use international geographic arbitrage.

Moving to a low cost of living (LCOL) country can lower your earnings need drastically and can make your existing savings from a high cost of living (HCOL) country last even longer.

Let’s take an example. If you live in New York, you need an average of $7,800 to sustain a family of four while in Bali, Indonesia you would need $1,983 to do the same. That is 25% of the amount you would need in New York. You see how one month’s expenses in New York just became four months’ expenses in Bali?

If we compare Copenhagen in Denmark (where I live) with Chiang Mai in Thailand, you could more than halve your expenses (57% to be exact) and maintain the same cost of living.

Geographic arbitrage doesn’t only have to be focused on expenses. It can equally be focused on salary levels. If your occupation is in high demand in a certain country, you might be able to benefit from higher salary levels by moving there. If the salary is high relative to the expenses, it can equally make sense to an HCOL country 🙂

Benefits of relocating to a cheaper area

So why should you even consider geographic arbitrage in the first place, you ask?

Let’s take a look at some of the benefits:

  • Make your savings count: When you take your HCOL savings to an LCOL area/country, you will be able to maintain the same standard of living by spending much less – and the money you have already saved will take you even further
  • Become financially independent faster: You might become financially independent faster than otherwise and achieve a high level of freedom you wouldn’t have in an HCOL area/country
  • Increase your salary relative to costs: If you move to a new area where your profession is in higher demand, you might be able to earn more compared to your expenses
  • Reduce belongings: When you move to a new area, you are forced to reevaluate which things you want to bring and start downsizing
  • Live more minimalistic: When you become more aware of price differences and your true needs, you might start living more minimalistic
  • Experience something new: Moving to a new area/country might be a great experience and something fun for you and your family to try

While these benefits look quite attractive, there are more things to consider.

Remember to consider non-financial aspects of moving

Obviously, there are more things to consider when moving you and perhaps your family to a new area or country. Money is only one aspects and not always the most important:

  • Family and friends: Moving away from close family and friends is one of the major drawbacks of leveraging geographic arbitrage and you need to find out whether you can live with that
  • Preferences: Considering whether you, your partner or your kids like the new area and can live a happy life there is of course a very important thing to consider
  • Things you will miss: Making sure you know exactly what you will miss in your current area/country before you leave will make it easier to make an informed decision of whether to move or not

I would argue that these three things are the most important to consider – and then the financial aspect comes second.

Geoarbitrage and working remotely

Obviously, the best thing you can do is to live in an LCOL country/area with an HCOL salary. If you have the chance to work remotely and maintain an HCOL salary, you’ll be in a very good position and you might be able to make the move much faster than you otherwise would have.

Being a blogger myself, I know that the income from this blog is location independent. I might use that to my advantage at some point in the future – if not all year then at least parts of the year 🙂

Your turn: Have you considered or tried geographic arbitrage?