“The Peak” is a secluded neighborhood overlooking Hong Kong, the world’s least affordable city.
As the most expensive neighborhood in the world’s most expensive city, The Peak boasts some truly mind blowing real estate prices. Apartments in the exclusive zip code start at $5-13 million. Start!
From there, prices just keep rising. Back in 2015, Ali Baba’s founder, Jack Ma, reportedly purchased a $191 million-dollar home in the neighborhood.
Of course, you or I wouldn’t dream of leveraging up to buy a $13 million-dollar apartment in the most expensive neighborhood in the world.
Which begs the question… Why are so many people doing the exact same thing in our backyard, every single day?
California Dreamin’
For quite a while, I’ve been sitting on the idea for this post. Or is it a rant?
In any case, I think the topic first hit me during one of the Money Wizard’s mainstream media features. Reaching the front page of the internet ushered in all kinds of protests into my inbox, and I got email after email about why saving serious amounts of income is unrealistic for this type of person, that group of people, or some other one-off situation.
Maybe the most legitimate protest, and certainly the hardest to immediately refute, was the classic, “I live in a high cost of living part of the country” complaint.
At first glance, it certainly passes the sniff test. I visited San Francisco in April of last year, and my frugal side nearly had a brain aneurysm when I ordered two beers at a “dive bar” and was handed a $20 tab in return.
“How can anyone afford to live here?” I asked myself.
This planted thought continued to grow inside my mind for months and months. Yet, no matter how much I wrestled with the question, I couldn’t help but feel all hope was lost for the poor coastal dweller, facing million-dollar home prices chased with million-dollar bar tabs.
And then, things really got out of control when my blogging buddy Sam from FinancialSamurai.com released a post titled, Why $5 Million Is Barely Enough to Retire With a Family.
You see, Sam’s long-time San Francisco resident, and his aptly titled post outlines why even a nest egg of $5 million might not be enough to retire… IF… you live in the high cost of living California City.
(To give credit where it’s due, I’m a long time Financial Samurai reader and think Sam is a fantastic blogger. He knows his stuff. But that doesn’t mean we have to agree on everything. And besides, isn’t it more fun if we don’t?)
The High Cost of Living (HCOL) Conundrum
Why do I think the high cost of living complaint is such a B.S. excuse?
Because it’s always laced with an underlying vein of “Look how difficult life is for us Californians. See how bad we’ve got it!” that’s as big as the San Andreas Fault Line.
HCOL folks act like it’s some sort of uncontrollable expense.
“Aw shucks, I accidentally landed in the most expensive real estate market in the world…”
Can you imagine if Hong Kong’s residents of “The Peak” neighborhood started filtering into this article’s comments, complaining about how tough it is to retire early when they’ve got $13 million dollar apartments to buy?
Make no mistake. You choose where you live. Sure, there’s the rare circumstance where somebody is trapped in a living arrangement due to the dire circumstances of a sick relative, a messy child custody battle, or whatever else.
But back in the real world, everyone else is living where they live because they made a consumption choice. They woke up every day and told themselves, “No thanks, I’d rather not move. I’ll keep living here, no matter what it does to my finances.”
How I almost fell into the high cost of living trap
Look, I get it. You want to get lost in the sparkling lights of New York City, or spend your weekends chilling on the California beaches.
OF COURSE you want to live in those places. EVERYONE wants to live in those places! That’s exactly why their costs are through the freakin’ roof.
Millennials are especially guilty of this. They want to pack their bags, spread their wings, and start a new adventure in a foreign place.
But before you go committing financial suicide via relocation, hear me out.
I should know, because I’m somewhat guilty of it too. After college, I took a job three states away. I packed up my $20 worth of possessions and moved from Dallas, TX, where I’d spent my whole life, to the completely new and exciting Denver, Colorado.
And I had a blast. For a little while.
And then, the reality hit me. Like a bad hangover, the consequences of my actions squeezed a vice around me. I realized I’d built a wall for myself with no ladder in sight. Real estate prices were sky rocketing, and I was either going to have to keep fighting this serious roadblock on my path to financial freedom, or I could make a change to something I could better afford.
And while money wasn’t the only reason, it was certainly a contributing factor when I headed north to Minneapolis, and immediately enjoyed a cool 20% relief in costs while still earning the same salary.
Get Rich, Then Move to a High Cost of Living City
Here’s an alternative to barely keeping your head above water in a high cost of living area…
Get rich first, then move wherever you want.
This is also known as actually being able to afford where you live.
I’m sorry, but until you’ve sold your first multi-million dollar company, you don’t get the privilege of buying a mansion in a gated community, moving to California’s expensive coastal cities, or purchasing real estate in Hong Kong’s The Peak neighborhood.
So, to all the high cost of living residents, you might be right. You might not be able to retire because of your high cost of living city. But you already knew this, so please don’t complain when you can’t.
Mr. Tako says
People go where the jobs are. For many people, this means moving to a HCOL city OR being underemployed in a cheaper town without the right jobs. Neither option is terribly desirable, but I will agree that there are some cities where people can put more money away.
Finding a job in one of those locations can create a huge improvement in one’s net worth.
In our case, we save a bunch of money in a HCOL area, and in the next couple of years we’ll move to a lower cost of living city.
AndrahilAdrian says
Yeah, it’s silly to assume every non-rich person living in HCOL areas is committing ”financial suicide”.
The Money Wizard says
Of course. This post was written as a rant against the millennial “moving to the city and figuring it out when I get there” or even the less obvious case – getting lured into an awesome city because of a high salary, without ever sitting down and running the numbers on the cost of living. And then blaming the HCOL for not meeting your financial goals.
I’ve seen way too much of this, both in real life and in this website’s inbox.
Obviously, if you can find salary in a HCOL city that more than offsets your increased costs, then you’re set!
AndrahilAdrian says
You neglect to mention salaries are generally higher in HCOL places, which offsets at least part of the living costs. Furthermore, there are way to economize on those, like living with roommates, parents, or a partner. A lot of FI people come out of SF and NYC. You mention one yourself in the article.
Sharil says
It’s actually more like ” financial torture”. HCOL usually have higher pay but for most people it’s not enough to offset their COL. These people may have more job opportunities but working more hours to live in this lifestyle. Don’t get me wrong, there are ways around it, flatting, car sharing, etc but quality of life decreases. I should know I moved a few years ago from a LCOL to HCOL area by a bigger paycheck. In LCOL I was working 4 days a week but had my own small place and able to save half of my income. In HCOL I am flatting, working 6 days a week to save half of my income. In a couple of years my contract will expire and I will move back to LCOL area so from experience I agree with this article.
Brian says
As the other commenters have said, a lot of the big time salaries are in high cost of living areas. If you want to make a lot of money, this is a necessary evil the majority of the time.
In the end, it all comes down to savings rate. Someone with a 50% savings rate making $100K after taxes in New York has $50K in expenses and is obviously saving $50K. On the other hand, let’s say somebody in Birmingham, AL with the same savings rate pulls in $50K after taxes. They’re saving and spending $25K. Although our Birmingham resident is saving a ton on cost of living, he/she is still not moving along as quickly towards FI as our New York resident despite having double the expenses. Both are killing it as far as FI goals, but one is clearly ahead of the other and will get there quicker.
Of course, if you can find that big salary in a low cost of living area, more power to you! But it’s not so easy for the vast majority of people, no matter how frugal they are. If you want to get to FI as quickly as possible, attaining the highest possible salary is very important. To do that, you’ll likely have to be in a high cost of living area. But that may be worth it if the salary is large enough.
Andy says
You also have to weigh that you could invest into a home in LCOL area place, where you may not have that option (or want to take on the risk) in a HCOL area.
You also add more risk, in needing to keep your job in HCOL area. 1 – 3 months are going hurt entirelly differently between areas.
Paul says
I think the appeal of HCOL places is diminishing, as may be the salary premium they used to enjoy.
When I joined a consultancy back in dinosaur times, they told me to pick an airport – they were going to pay me the exact same no matter where I lived (’cause they’d send me wherever they needed me to go). A low-cost, no income tax location was the best choice for me, even though I didn’t have oceans or mountains to inspire.
Frank Lessa says
What about people who live in a cheap place and then newcomers make it expensive?
The Proposition 13 Principle says that incumbent residents should not have to move just because newcomers increased the cost of living.
Karl says
I mostly agree. With some exceptions, people choose where they stay. I grew up in Orange County, CA and went to college in Fresno, CA. COL is much lower here in the middle of the state away from the coastline. When I started my career, I could have picked up and moved again, but I didn’t want to. I had connections here and I was content with the weather (modest winters, blazing summers). I joined a global accounting firm, and I later saw how starting salaries tiered by office. Not that I had a choice in office, but I was very happy with my lower salary, figuring I could do better in a low-cost area. Even better, being one of the few single guys in the office, I volunteered to be the lead road warrior and spent 6-9 months/year in hotels. Racked up a ton of hotel points, mileage reimbursements, and kept my housing expenses super low.
K C says
I grew up in La Habra, California. (It is in Orange County, California) My mother, siblings, Aunts and Uncles are here. My family is here. This is my home. Why is it so expensive?!? I would love for it to be more affordable so I could stop renting.
It is expensive to live in California because, we are in short supply of homes by about 1-2 million. We need more homes built. Why are they not being built?!? What happened to cause this? Who does not want more homes to be built here? These are the questions that need to be asked.
M3 says
Regardless of the cost of living, a person who lives below his/her means, and saves+invests money regularly and without fail, will succeed.
The Money Wizard says
Definitely true!
Hustle Hawk says
Interesting and difficult topic to tackle. ‘Get rich and then live where you like’ – I agree with that approach. The issue for many is that the fastest way to get rich may be too live in a HOCL area where salaries, opportunities etc… are best.
Particularly in the UK, for certain professions / occupations London is the place to be if you want to get ahead.
The focus should then be on hacking HOCL area expenses efficiently, e.g. choosing accommodation with minimal commuting / travel costs and utilities expenses. Minimising living costs by having roommates and maybe choosing accommodation which is a bit smaller or less pretty than the home of one’s dreams (but easier on one’s pocket at the end of each month).
HH
Julian says
You’ve gotta be smart about living in HCOL areas. I have friends who ran off to Cali or NYC after college without thinking twice. If you don’t have a high paying or prestigious job at a tech firm or on Wall Street, then the cost/benefit of living in a HCOL area won’t work out unless you’re OK with compromising by having roommates and taking public transit instead of owning a car. For the most part, I would just stay away from the obvious (NYC, Cali, DC, Boston, Denver, Seattle) unless you have an income well into 6 figures. There are plenty of large metropolitan Medium-COL areas that fly under the radar by having higher paying jobs but affordable neighborhoods.
Phillip says
Or work in one of those high paying jobs AND take on room mates, etc. to get rich even quicker, then move. My single classmate and I did this after B-school and worked in the Washington D.C. area as consultants. It worked out great.
Kris Kent says
Why didnt you buy in these high growth property markets? and hows the program now woth the s&p 500 tanking with trumps trade war? do you have a plan to survive trump?
The Money Wizard says
Not all HCOL are good investments. High price does not = high return on investment.
All markets go through waves, so I’m not panicking.
Sarah | Diamonds N’ Denim says
Yes!! You just voiced what I’ve been thinking (but been too scared to say out loud!). Being in an area where restaurants never close, Uber/Lyft is always available, and there’s more sightseeing to do than you’ll ever have time for is a luxury!
Loved this, thanks for sharing!
Cost Seg says
Many folks can easily fall into the high cost of living trap. Many states or cities that have a high cost of living also have high tax rates. So it is just too touch for many to scratch and save. Many should be re-evaluating their lives and goals.
Kris says
Money Wiz – when did you live in Denver? I am really curious as I am both a big fan of your blog and someone that lives in Denver.
The Money Wizard says
2013-2015, from age 23-25. The first place I lived after college.
Frank says
Go to a HCOL for the career opportunity and experience early in your career, build up a great CV, then use this CV to qualify for one of the few high paying jobs in a LCOL area.
Kyle @ NYPFGuy says
I completely agree with you that people get to choose where they live, so there’s no point complaining about the hardship of living in a HCOL area. However, just because one lives in a HCOL area doesn’t mean that they have to be broke and unable to afford the lifestyle of New York or Cali beaches.
I actually just moved to the LA beaches, and though it is quite expensive, it’s completely possible to live here and save good money. I spend about 1/3 of my salary on housing, 1/3 on expenses and then save the other 1/3. My partner and I spend a lot on housing, but we don’t spend much on other things. We don’t shop, we drive used cars, cook at home and most of our free time is spent doing free outdoor activities. Yes, I could save more money living in Texas or another state, but living in good weather by the beach is worth the cost to me.
It’s all about restructuring one’s priorities to get what they want most. You can have everything you want in life, just not all at once.
SimpliFI Mama says
I think it depends on your priorities. For us, warm weather and living by the beach is important and we want our kids to be able to experience that. We moved from IN to OH to NY to CA and culturally this is where we fit. We enjoy the people. Not to mention, I got paid 60% more in CA than in NY which allowed us to support our family on one income and hit FI in 4 years!
Ross says
Not looking for sympathy, as I’m living below the average in my area and we’ll on my way to FI…but freedom of choice on where we live doesn’t exist for those of us serving in the military…we go where we are told.
Barbra says
One thing not mentioned is the availability of jobs in one’s field. I am a meteorologist working with weather sensors and I just can’t go to any city to get a job. Not all of us work in a field where jobs are plentiful in most areas of the country. I would love to move to a lower cost area but jobs are few and far between.
Andy says
Don’t give up, I would just keep looking!