Geoarbitrage and Financial Independence

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A few months ago I reached out to Joshua Sheats and suggested that my idea of a Junior IRA (JIRA) might be a good topic for his podcast, Radical Personal Finance.

To my utter shock, Joshua agreed to have me on his show. You can listen to it here if you like.

Now, the interesting thing about my interview with Joshua was that he wasn’t particularly enamored with my JIRA idea. He allowed me, of course, to make my pitch, and then he respectfully explained why I shouldn’t waste my time trying to get it passed by Congress. His nonplussed reaction to my baby, in turn, really threw me for a loop. I’d thought he be all over the JIRA. But he wasn’t. And to tell the truth, his reasons for dismissing my JIRA idea were pretty damn cogent.

Nope, Joshua wasn’t into my JIRA idea. He was, however, into the story of how relocating from a high-cost state to a low-cost state helped us turbo-charge our drive towards financial independence. In other words, he thought our use of geoarbitrage brought more value to his audience than my idea of turning America’s children into little Warren Buffets.

Was he right?

In an effort to find out, I thought long and hard about our geoarbitrage experience. Here are the primary benefits that we derived from this ploy.

The Effect of Geoarbitrage on Our Net Worth

In 1997, I put $7K down and bought a one-bedroom condo on Long Island for $70K. In 2002, I married Mrs. Groovy. In 2004, Mrs. Groovy and I refinanced our condo and took out $20K in equity to help pay for a kitchen and bathroom remodel. In 2006, Mrs. Groovy and I sold our condo for $340K. After all of the real-estate mumbo jumbo, after paying the remaining balance on the mortgage, after paying our realtor and attorney, and after paying the various taxes and fees a seller is hit with at closing, Mrs. Groovy and I walked away with a little over $250K. Add this to the $60K in savings we had accumulated, and Mrs. Groovy and I moved down to Charlotte with no debt and $310K in our pockets.

When we got to Charlotte, we bought a nice two-bedroom condo in a nice area for $88K. Since we paid cash, our closing costs were minimal—less than $1,000. Our net worth when all was said and done was $309K.

Now suppose for a moment that Mrs. Groovy and I decided to stay on Long Island and buy a house. A decent three-bedroom house in a decent neighborhood on Long Island in 2006 would have easily cost $500K. If we wanted a house that didn’t have a 1970s kitchen and bathroom, we’d be looking for a house in the neighborhood of $600K. But let’s further suppose that Mrs. Groovy and I love the Brady Bunch-era decor and went with the $500K house. Our mortgage would have been $250K (assuming we put all of the $250K profit from our condo towards the house). Our closing costs would have been around $10K. And our net worth would have been around $300K ($500K house plus $60K in savings minus $10K closing costs minus $250K mortgage).

At first blush, moving to Charlotte didn’t materially improve our net worth ($309K versus $300K). But don’t forget, 2006 was the height of the housing boom. Real estate prices were about to change dramatically for the worse in many parts of the country. Long Island was one such market. Houses that sold for $500K in 2006 couldn’t get anywhere near that in 2008. Such houses sold for $400K or less.

Charlotte, on the other hand, weathered the housing bust a little better. Its housing market didn’t take a hit until 2009. And the hit wasn’t as severe as Long Island’s. In fact, Mrs. Groovy and I sold our Charlotte condo in the spring of 2008 for $115K. So by choosing to move up the housing ladder in Charlotte rather than Long Island, our net worth experienced a positive swing of at least $100K.

Also, by moving to Charlotte, most of our assets were in cash ($220K cash versus $88K housing). Had we remained on Long Island, most of our assets would have been in housing rather than cash ($250K housing versus $45K cash). In Charlotte, then, we had $220K to furnish a new home, establish an emergency fund, and begin our investing careers. On Long Island, we would have had only $45K to throw at these three critical needs.

The Effect of Geoarbitrage on Financial Independence

By lowering our monthly expenses, geoarbitrage allowed us to generate a lot of investable income—defined here as the difference between our monthly take-home pay and our monthly expenses.

The table below shows just how much more investable income we were able to generate by leaving New York. Let’s delve into those numbers.

 Last Year on Long Island (June 2005 to May 2006)First Year in Charlotte (June 2006 to May 2007)Second Year in Charlotte (June 2007 to May 2008)First Year on Long Island Had We Bought a Decent Three-Bedroom Home (June 2006 to June 2007)Current Year in Charlotte
Household Income$124,000$129,000$94,000$129,000$125,000
Monthly Pay After Payroll Taxes and Health Care Deductions
$6,500$7,000$5,200$7,000$7,900
Monthly Expenses$4,500$1,800$1,800$6,250$2,600
Monthly Income Available to Invest$2,000$5,200$3,400$750$5,300

When we left New York in 2006, Mrs. Groovy was fortunate enough to keep her New York job (thank you telecommuting). And I had enough vacation and sick time to remain on my government job’s payroll for another year. For our first year in Charlotte, then, our household income was $129,000. Our monthly take-home pay—defined here as whatever was left after payroll taxes, union dues, and health care contributions were deducted from our paychecks—was slightly higher than the previous year’s. This was largely due to Mrs. Groovy enrolling in her company’s 403(b) plan. Meanwhile, our monthly expenses went down dramatically. I know in our first year in Charlotte our monthly expenses were under $2,000. I vaguely remember them being around $1,500. If we do a little more than split the difference and say our monthly expenses were $1,800, Mrs. Groovy and I had $5,200 a month to invest.

So simply by moving to Charlotte, we had more than two and a half times what we had in New York to invest monthly ($5,200 versus $2,000). That’s pretty freakin’ groovy.

But sadly, the chasm between our take-home pay and expenses would not stay nearly so large.

In our second year in Charlotte, our monthly investing income took a nice hit. I got a job that paid roughly $37,000 less than my New York job. Ouch! But because I was able to enroll in my company’s 401(k), and because I was no longer paying union dues and New York State payroll taxes, we were still able to take-home roughly $5,200 each month. This in turn dropped our monthly investing income from $5,200 to $3,400. Not good, but still much better than anything we would have been able to do in New York.

Had we stayed in New York and moved to a decent three-bedroom house, our monthly expenses would have gone up dramatically. I figure with a bigger mortgage, higher property taxes, larger utility bills, and larger maintenance costs, our monthly expenses would have gone up around $1,750. This means that our monthly investing income would have come to $750. Compare that to our monthly investing income during our first year in Charlotte ($5,200 versus $750). The Charlotte amount was almost seven times larger. In our second year, it was four and half times larger ($3,400 versus $750).

Currently, Mrs. Groovy and I have $5,300 to invest every month. Had we remained in New York, we wouldn’t have nearly this amount. We would have more than $750, but nowhere near $5,300. My guess is that the spread between our take-home pay and expenses would be in the $2,000 range—similar to what it was when we left in 2006.

Okay, here’s the bottom line. Geoarbitrage allowed us to generate a lot of investable income. And fortunately for us, we were disciplined enough to use the bulk of that money for investing. Sure, we had a our share of fun, but we never lost sight of the prize—financial independence. And after only nine years of investing, we achieved the Mustachean Threshold. We accumulated over twenty-five times our annual expenses. We would never have been able to do that in New York.

The Effect of Geoarbitrage on Our Sangfroid

If you have debt, you’ll always have worries. Life doesn’t give a crap about your debt. Your transmission won’t hold off on blowing up because you have a huge mortgage. Your boss won’t hold off on outsourcing your job to India and forego his bonus because you have a crippling student loan burden. And your school board won’t cut you some slack on your school taxes because your credit cards are maxed out.

Life still happens in Charlotte, North Carolina, of course. But because geoarbitrage allowed us to get out of debt and remain so, we don’t fret over life’s inevitable emergencies or financial hiccups. We certainly don’t welcome them, but we certainly don’t fear them like we did in New York.

No debt = no stress = peace of mind.

Geoarbitrage also helped us eliminate another major cause of stress in the modern world: the commute to work.

Back in New York, Mrs. Groovy’s commute from Long Beach to her Manhattan office via the Long Island Railroad and the MTA subway system was an hour and a half each way. And riding the rails in New York is hardly a blissful experience. Each night Mrs. Groovy returned home she would first kiss me and then announce the number of times she had been body-checked.

My commute wasn’t nearly as bad—forty-five minutes each way. But I still had to deal with the idiots on the Meadowbrook Parkway and the Long Island Expressway. And that wasn’t fun, unless you consider getting the finger from another motorist because you were only going ten miles over the speed limit a joyous example of social interaction.

When we moved to Charlotte, Mrs. Groovy’s commute went from an hour and a half each way to ten seconds each way. My commuting time remained the same (forty-five minutes each way). But it was a much more civilized commute, and it only lasted for six years. Three years ago, my company closed the Charlotte office and moved its functions to Dallas. But it allowed me to stay in Charlotte and telecommute. So now I have the same ten second commute as Mrs. Groovy.

No commute = showers are optional (for Mr. Groovy anyway) = working in sweatpants = life is effing great.

Finally, geoarbitrage saved us from Long Island winters. Don’t get me wrong, Long Island winters aren’t as severe as say, Buffalo’s or Detroit’s. But they still suck, and while I was living and working there they sucked extra big-time. This was because I worked for a highway department. Every time it snowed, I had to go freakin’ plow.

No winters = no shoveling and no scraping = we’re so happy we left New York.

Final Thoughts

Geoarbitrage worked out incredibly well for Mrs. Groovy and me. But is this a viable ploy for others? After all, our experience with geoarbitrage was accompanied by some fairly unique circumstances. We sold our home at the height of an epic real estate bubble. We both had master degrees. We both had very supportive families. And we were sans debt and sans children.

Obviously, not everybody is going to have similar advantages. Our circumstances were tailor-made for geoarbitrage. But I have a hunch that geoarbitrage is still a worthwhile ploy for many wishing to jump-start or turbo-charge their quests for financial independence. And I hope to explore this hunch in future posts. Until then, groovy freedomists, be well and stay groovy.

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26 Comments

  1. Greetings Groovy Cats! I enjoyed your podcast with Joshua; it’s always nice to know there are other crazy people out there. My wife and I have also used geoarbitrage within a low-tax state, GA, to increase our net worth. In 2009 we took jobs in a one-stoplight town where we saved $250k in three years. In 2014 we moved to another small town, lived frugally, and saved about $238K on our fat cat teaching jobs.

    Combining geoarbitrage with frugal living and hardcore savings is a powerful formula for wealth building. I enjoy your blog and look forward to meeting you guys some day. Keep up the good work,
    Ed

    • Mr. Groovy

      Hey, Ed – we just listened to your interview on the MadFientist podcast the other day! And we thoroughly enjoyed it. Thanks for the kind words about our interview with Joshua. I’m still a bit self conscious about my New Yawk accent.

      I love reading about your net worth and the impressive gains you’ve made from year to year. You’re definitely a financial rockstar!

      And yes, we would love to meet up with you. In fact, do you know Fritz @ Retirement Manifesto? He’s another Georgia boy and we’ve touched upon the subject of holding a southeast meetup this fall. There’s probably at least a dozen PF bloggers in the NC-SC-GA area. I’ll put together some ideas and see what everyone thinks.

      Thanks for stopping by. It was great hearing from you.

  2. I recently moved from Manhattan to the Midwest. It was either I move to the Midwest with my NYC salary or my GF move from Midwest to Manhattan with her Midwest salary… I think you can guess why we chose what we chose. It’s been great so far. The quality of life I think is actually better here than in Manhattan (for me anyways) and it costs a heck of a lot less. Yes my family and friends are still in the Northeast, but my decrease in expenses allows for a decent amount of flights back per year without feeling guilty. I’ve only been doing this two months, but hope I can continue it for much longer.

    • Mr. Groovy

      Hey, Mr. FF. I think you made the right move. I’ve made some trips to the Midwest over the past few years (Madison, Chicago, Minneapolis, South Bend, and Ann Arbor), and the region seems pretty cool to me. I guess it all depends on one’s temperament or tastes. I understand the appeal of Manhattan. But I’m not a theater and gallery guy. Give me a movie, a juicy burger, and some blue-collar wisdom at the local old-man bar and I’m a happy camper. The only reservation I had about leaving New York concerned family and friends. But like you pointed out, decreased expenses allows for ample guilt-free visits. And in my case, I got extremely lucky. After my parents and siblings saw the quality of life I had in Charlotte, they decided to leave New York as well. Good luck on your geoarbitrage gambit. I think you and your girlfriend will be very satisfied with the results.

  3. Yes, I can definitely understand this as a fellow New Yorker (well former NYer for you guys). I actually live in Queens but commute out to Long Island. Everyone tells me that I have a “reverse commute” so all is good….yea right…there’s still A LOT of traffic. The appreciation you got from the sale of your condo is awesome. Good thing you left right before the housing market crashed. I often think about moving to lower cost area but it’s hard to leave family and friends. And I also work in government…that pension can be a golden handcuff…

    • I hear ya about the “reverse commute.” When I was a little kid (late 60s, early 70s), that exotic beast did exist. But by the time I left Buffalo University (1984), it was extinct. Traffic on the LIE and the parkways is horrendous 24/7 now, regardless of direction. And, yes, Mrs. Groovy and I were very, very lucky on our condo sale. Had we sold a year later, we would have easily been out $100K. Thanks for stopping by, Andrew. It’s always great hearing from a fellow New Yorker, and a public servant to boot.

      P.S. The pension is a golden handcuff. After a certain numbers years in the system, it becomes very difficult to walk away from. I left after twenty-one years, so I’m getting a mini-pension starting in October. Had I remained , my annual pension would be $50K greater.

  4. In an effort to accelerate our FI journey, we chose to move to a lower-cost area, sacrificing all the trappings of suburban life for a small plot and a small house in an urban area. Best decision we’ve made yet! It’s hard to put a price on the time and money we’ve saved, but I have a pretty good idea what that might look like. 😉

    • Hey, Claudia. Agreed. To accelerate the journey to FI, geoarbitrage is a great tool. Mrs. Groovy and I have absolutely no regrets in moving from New York to NC. Like you pointed out, it’s hard to put a price on the time and money saved. I would also add to that the price of eliminating stress. I haven’t worried about money in ten years now. Had we remained in New York, money would have been a constant issue. I’m glad geoarbitrage worked out for you. What is being accomplished over at Two Cup House is very inspiring. You guys are awesome.

  5. So I am sitting here paying my NY taxes – stuck here for another couple years (kids in high school) and I am closer to Buffalo (grew up right near there) – so I get the part about the winters! I definitely think geoarbitrage can work for people (depending on their situations). It would take time and research, but if things line up – there are wonderful communities to enjoy where the cost of living would definitely accelerate the path to FI. Having defined those “end goals” or decision principles would be key before making such a move!

    • Mr. Groovy

      You nailed it. Geoarbitrage can work, but you got to do your homework. Having simple tastes would help as well. It doesn’t take much to make Mrs. Groovy and me happy. A walk, a Blizzard at Dairy Queen, a Columbo rerun on Netflix–and we’re feeling mighty fine. So our temperament works in a lot of localities, especially small-town America. I have friends and family, however, who are a lot more refined and desire a lot more culture. Their needs can only be met by a New York, Boston, San Francisco, etc. So geoarbitrage probably wouldn’t work for them. Thanks for stopping by Vicki. It’s always great hearing from a Western New Yorker.

      P.S. A guy from Buffalo moved down here and opened a bar called Tavern on the Tracks. Best beef on weck I’ve had in years!

  6. We had to move for health reasons, from Seattle to Phoenix. It meant that, once I found a job I could do around my disability, we could actually afford a house. Wouldn’t have happened in Seattle. Or at least not for at least another five years, I think. Probably closer to a decade.

    We were lucky to get in right before prices started going back up. We got a foreclosure cheaply, so even with upgrades our mortgage is less than rent here (and especially in Seattle). Granted, there’s utilities and repairs, but still… a much better deal.

    • Mr. Groovy

      If done correctly, geoarbitrage can greatly improve one’s life. I love Seattle, but I also love home ownership. And I also love not being weighed down by bills. Moving to Phoenix was a home run. I got one question for you, Abigail. How are you and the hubby in the heat? Mrs. G and I briefly considered relocating to Vegas, but Mrs. G was very apprehensive about 110-degree days. So we opted for the cooler 95-degree days in Carolina.

  7. I think about this a lot – where we live versus where we teach. Ed Mills offers a lot of food for thought for this as it relates to teaching. We did a very mini version of this. We moved into a different village that is still within my school district boundaries. Our house cost $100k less (and/or was 2-3 decades newer) but still benefits from one of the strongest school districts in our state. Of course, if we went more rural, we could live for less. But with teaching salaries tied to taxes in IL, it may not be as beneficial as other states where salaries are funded differently. So glad you went on the podcast and got to share your wisdom. You and Mrs. G are WONDERFUL leaders in this arena.

    • Mr. Groovy

      It’s been a long time since I have visited Ed Mills’s site. Thanks for the reminder. He’s an awesome resource for anyone. Glad to hear that geoarbitrage helped improve your situation. I’m pro-education, but I loathe the current business model of public education. The average per-pupil cost of public education in this country is slightly north of $10K. A class of twenty kids brings in $200K. What percentage of that $200K does the teacher get? A quarter? Where does all the money go? Under Obamacare, health insurers must devote 85% of their premium revenue to paying for health care. Perhaps we need a similar law in education. Wouldn’t it be wonderful if 85% of school taxes went to classroom teachers? Sorry for the rant, Penny. Our current system doesn’t serve taxpayers, our teachers, and our kids well. And I just don’t know why we put up with it.

  8. Excellent point, ZJ. One’s commute can definitely ruin one’s happiness. Mrs. Groovy claims that freeing herself from her New York commute saved our marriage and her sanity. Her commute was that unpleasant. So I understand the trade-off. And I can’t begrudge someone who prefers higher housing-costs to higher commuting costs.

  9. My proposed version of geoarbitrage is developing a skill that will make my work location independent. The fastest benefit will be the reduction of my commute, which is not terrible on public transportation here, but other people can be awful. Working from home, or from my LLC’s office that is a short walk from my place will definitely increase my happiness.

    I want to stay in cities that do not require me to drive, which means I must pay for the luxury.

  10. We are seriously considering a move to SE Asia in the next 5 years. Doing our homework on Thailand, Malaysia or Bali at the moment. The cost of all of these places is significantly lower than Australia and we have always loved the culture, food, people in this part of the world.

    Truth is, an ex-pat can live a very comfortable life for about 1/3 of the cost depending on how you choose to live your lifestyle.

    I agree, one doesn’t want to move to somewhere cheaper if it offers a lower quality of life just to save money. That’s not what financial independence is about. But to move somewhere cheaper because you want to is a different matter.

    Good on you Mr and Mrs Groovy. It sounds like it’s really worked for you and your reasons are all sound.

    • I love it, Martin. Mrs. Groovy is very fascinated with Thailand. She loves watching YouTube videos made by Aussies, Brits, and Yanks living in Thailand. Who knew there were so many 7-Elevens in Thailand? And, yes, the cost of living there is extremely modest by our standards. So I can definitely see the appeal. If things ever got really bad over here, we would seriously consider bugging out to SE Asia.

  11. I was planning to cut costs by moving from expensive NJ down to FL, but then I met my wife. She wanted to stay in NJ for several reasons (family, doctors, etc.), so we remain here. If that situation ever changes, I’d be happy to reap the benefits of geoarbitrage. Sounds like timing and employers who allow you to telecommute were on your side. Glad it worked out so well for you!

    • Yes, the financial gods were definitely smiling upon me and Mrs. Groovy. We totally lucked out with timing and employers. Sorry to hear that your move down to FL has been delayed. But as soon as Mrs. SST is ready, we welcome your move below the Mason-Dixon Line. North-Easterners make the best honorary Southerners.

  12. At the end of the day, geoarbitrage is not a “solution” to accelerate one’s retirement. People don’t move to a location because it’s low cost. They move there because they like the people, the houses, etc…

    I used to think I was doing geoarbitrage with my goals of coming back to Japan from the US. Then the Yen increased by 20% in 6 months. But… I still want to move to Japan. I’m not going to move to another country just because the Yen became much more expensive.

    • But some people might choose to move to a location based upon its low cost of loving. At the end of the day, if people want financial independence badly enough, they will forsake other things that most people care about, like houses, people, etc.

      However, I’m just playing devil’s advocate. I’m one of the people you describe above. I cannot imagine making a move based upon these considerations alone, but I applaud those who can do it.

    • Absolutely. Nobody’s rushing to Detroit right now. And you can get a house there for a $1! So low-cost isn’t the only concern. For wealth-boosting geoarbitrage to work, you need to find a community that is low-cost, safe, and compatible with your cultural values.

    • In regards to Stockbeard’s comment:

      Yes. If you truly LOVE where you live and work you will want to settle in, dig in your heels, and persevere.

      And that’s what my wife and I did when we were in a bigger city. But for the sake of financial freedom we decided we would find a city with lower property value to fall in love with.

      It’s like I tell my wife all the time, “…you know I’m capable of loving more than just one woman..” – (that one never goes over well – no sense of haha)

      Anyway, we did move to a smaller city and fell in the love with it – MORE than where we thought heaven was in Lake Bonavista Calgary. Now the mortgage is paid, all vehicles paid off, $320K in RRSPs and $60K in a rainy day fund.

      We’re so relieved and life is 10 times better. I think Geoarbitrage was THE BEST THING we ever did.

      I’m sure it won’t work for everyone but if there is a way to make it happen it should be carefully considered.

      B