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|
|Monthly Pay After Payroll Taxes and Health Care Deductions||$6,500||$7,000||$5,200||$7,000||$7,900|
|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.
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.