Geographic Arbitrage: Moving To Reduce Your Cost Of Living

Geographic arbitrage

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?



Nick @ TotalBalance April 15, 2019 - 15:14

I’d love to move somewhere warm (and cheap)!
After having kid(s), I just have to admit that family and friends have become extra important. Also, my kid will be starting school next year, and we’ve found a really great school (private, out-dorsy and non-preppy, and it includes a food program 😛 ) close to where we live.
Also, while the cost of living is high in Denmark, you should’nt neglect the level of security, stability and the abundance of opportunites that the (seemlingly) high price gets you. If we moved to the US (we were planning to, before we had our daughter), our housing and living expenses might go down, but the cost of education and insurance (health) would explode. I still dream about it everynow and then, and I did spend a few days browsing for viable locations in the south (of europe) in December.

The problem that I encountered was the places that I found desireable was on islands! (Cyprus, Mallorca, Madeira etc.), and I don’t want to be reliant of airplanes to get OFF the island 😛

Where would you move to?..

Carl Jensen April 15, 2019 - 16:49

Same here! You are right that kids, family and friends tend to tie you to a certain location. Now, I don’t have kids yet, but do you think it is impossible to have your kids out of kindergarden/school from November to February each year until they turn, say, 12?

Interesting with the Southern European islands! For me, I had imagined it would be somewhere in Asia if I were to do it – probably Thailand. There’s many amazing and diverse places in Thailand, flight connections are good, transport is easy, food is great and prices are still relatively good.

… and private school – that sounds expensive? 😉

Nick @ TotalBalance April 15, 2019 - 17:48

Well, I picked Europe because I wanted to be in the same time zone as my family, and also be able to go back to Denmark (to visit family/friends) without it having to be an entire days journey. I’ve never been to Thailand, but I’ve heard good things about it 😉

I’m not sure I would be able to pull my kid out of her kindergarten for extended periods of time – unless she had a network of friends/family at the “winter location” 😉 But I suppose if you cultivate that at an early age, it could work. You’d still have to pay for the daycare back home though (to secure the spot). Your kids well-being is vital for YOUR well-being 😛

Private school is 2500kr/month. We pay 1765kr for her daycare today, but we used to pay 4500kr (!) when she was in a private daycare (before we moved). So it will be a small increase from now, but not much 😉

Carl Jensen April 16, 2019 - 12:24

Makes sense with being in the same time zone… and having to pay for daycare back home never crossed my mind – so much to learn with those kids 😉

Private school is actually cheaper than I expected. How come you chose that?

Nick @ TotalBalance April 16, 2019 - 12:59

The private schools are still 2/3 funded by the governement, so it’s not as expensive as most people think 😉

We chose a particular private school (a so called “little” school), because I don’t have a whole lot of faith in the public school system, to be honest.
My kid is a product of two well-educated parents – I’m quite sure she will learn how to read and do math.

What I really need her to learn in school, is how to become a “whole person”, with all that entails 🙂 And I have serious doubts whether our public school system will be able to produce that 😉

The school that we’ve chosen focus a lot on the whole person, rather than just teaching them how to read and do math. They focus a lot on creativity, exercise, food, nature and how to be an individual in a highly un-individualistic society, while still focusing on how to contribute your own “uniqueness” to the community, and that’s you can be a strong individual while still being an active and engaging part of a group 🙂
Yes, it’s a hippie school 😛

Also, we’ve always focused on our daughter being in a “smaller” and safer environment (her daycare only has 20 kids in total, and we’ve always loved it), which the little schools are great at, I think.
Originally I was dead set on having her in a public school (because I’m a product of a public school – and I’M FINE! Sort of 😛 ), because I didnt see any reason why we should pay EXTRA to get FREE education!?
But seeing her develop in the environment that she’s flourished in, it’s clear to me that we should strive to keep her in a similar environment during her school years too 🙂

Looking back, I think I would have loved to be in a more creative and “free” environment. I was one of the lucky ones in my school class though. Only 4 pupils out of 25 was declared “ready” to proceed to a high school education when I graduated 9th grade (luckily, I was one of them). I’m afraid the odds haven’t improved since…

Carl Jensen April 18, 2019 - 13:59

Very interesting to hear your thoughts, Nick – especially given that I’m soon becoming a father myself.

My wife used to go to a kindergarden that had the same qualities as you mention the school has. In fact, everyone I know who went to that kindergarden or spent the first years of their school life in an alternative school are much more open-minded, approachable and outgoing people today, so I tend to agree with you, but my sample size is not big enough to conclude anything obviously 🙂

I’m not sure whether staying in alternative schools all the way through high school will make it easy for them to “integrate” into the more normal educational system or labor market later on (I’ve seen a few of those cases too, but I can’t conclude anything), but I guess you know what is best for your kids when you see them flourish.

I like your prioritization even though it costs a bit every month – I guess we all have non-frugal things that we prioritize 😉

Nick @ TotalBalance April 24, 2019 - 10:00

This is an interesting philosofical discussion that we have going on here, so I’m going to leave you with one last thought here (this is to address your concern of kids of “alternative” educations being able to integrate seamlessly into society).

In general we tend to shy away from the “mass-produced” goods like McDonalds & Burger King, frozen pizzas and ready-made dinners because we know it’s not healthy. We also try to avoid anything “made in china” – you know the kind of plastic stuff that breaks after first use? 😛 So, anything mass-produced in a factory is BAD (except our Iphones – we need those of course! 😛 ), right? We love food made from local produce, cooked with love and just the right amount of “imperfections”. This is why all those small cafés in the city are so popular, right? Cause they’re unique, and produce unique food/beverages to thrill our tastebuds!

How is it then that we don’t mind our kids being “raised” in a “factory” (schools with 1000+ pupils), which are designed to produce “hamsters”, ready for the threadmill? 😉

I’d actually kind of prefer it, if my kid grew up and refused to hop on the hamster wheel – but of course it’s difficult to make a living, if you don’t at one point do it 😉

Carl Jensen April 24, 2019 - 15:18

That’s a great metaphor!

I guess the school is just one way kids are being influenced, so I agree with you, they need stimulus from other things that are not set up as a factory to become complete humans… but sometimes, mass-produced things also make our lives easier, as you say. I guess it’s all a balance, and as a parent, I’m sure you know what is best for your kids 🙂

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