Geographic arbitrage is a term coined by the FIRE movement (Financial Independence, Retire Early). FIRE advocates combine investments and a typically high-paying job to achieve the dream of retiring by the time they hit their early 40s or even late 30s. One of their core tactics is to take advantage of local costs of living around the country and even the world to maintain the lowest cost of living possible, thereby stretching out their money and making early retirement possible.
This isn’t a new insight. Americans routinely look for lower costs of living. What geographic arbitrage adds is the idea of taking that model to the extreme. Where moving from the city to the suburbs can let you upgraded from a one-bedroom apartment to a house, moving from New York City to Naxos, Greece, can let you rewrite your financial future.
Here’s how it works.
What Is Geographic Arbitrage?
Arbitrage is a financial term which means taking advantage of different prices for the same assets in different markets. For example, say lobster costs $8 per pound in Portland, Maine, and $20 per pound in Detroit. This would create an arbitrage opportunity where someone could buy lobster in Portland and sell it in Detroit for a tidy profit.
Geographic arbitrage extends this idea to costs of living. For example, at the time of writing, the median rent on a one-bedroom apartment in Boston was around $2,450 per month. In Orlando, Florida, you could get the same thing for just over $1,200. Simply by moving from one city to the other you can cut your rent in half, effectively increasing your monthly income by more than $1,200.
You can take that idea further. In Chiang Mai, Thailand, a two-bedroom apartment will cost just over $300 per month. Half of that will pay for the same space in Vientiane, Laos. In Athens, Greece, you can rent a fully furnished one-bedroom apartment for less than $600 per month, and a house in Oaxaca, Mexico can cost approximately $400 to lease.
These examples illustrate a broader point. By being willing to move around the country and the world, you can dramatically change your financial options. Costs of housing, food, insurance, medicine and all other day-to-day factors of life can change radically depending on where you live and which currency you spend in. Choosing lower-cost places to live lets you keep more of your income and savings, putting substantially more of that money back in your pocket.
Remote Work Has Created Opportunities
The catch to geographic arbitrage is simple: you need to make a living.
Many people live in expensive communities not necessarily out of choice but because that’s where the jobs are. This is why the FIRE movement has embraced geographic arbitrage, since the whole idea is based around early retirement. However, it is also what gave rise to the idea of the “digital nomad,” men and women around the world who work remotely full time in a digital age, and who have taken that freedom and run with it.
Digital nomads work wherever they can get a WiFi connection since their jobs have moved entirely online. They conduct meetings over conference calls, produce documents in shared drives and send ideas over email. Most of them do have full-time employers; they just work permanently out-of-office.
This is a lifestyle that many Americans have gotten very used to during the coronavirus padenmic, as lockdowns sent workers home in droves. In the months and years ahead, many companies expect to keep this going, with staff working remotely for the foreseeable future. This creates an unusual, perhaps unique, opportunity for many workers. For the first time completely free of geographic ties to an employer, people can decide where they want to live based entirely on their personal preferences.
That can mean seeking out low-cost places to live and capitalizing on the cost differences. Depending on where you go, this can also mean the adventure of a lifetime. Spending a year working from the beaches of the Gili Islands or a mountaintop apartment in Cusco, Peru, won’t just save you money. It will also give life experiences you never forget.
Applying Geographic Arbitrage
Capitalizing on costs of living can help anyone save money, which is worthwhile in and of itself. Yet it can also help you meet very specific financial goals. In fact, unless you’re interested in living overseas long term, short-term geographic arbitrage is generally a more useful pursuit. A few case examples include:
- Paying Student Loans – A young person with student debt might be a textbook best-case geographic arbitrage. Someone who doesn’t yet have children or family obligations can more easily travel long term, and the person’s other financial obligations are also likely to be light. Someone pursuing this plan would capitalize on the difference in costs of living and throw that extra cash at their Department of Education debt. Moving from New York to Charlotte can help make repaying a student loan significantly more manageable. Moving to Bangkok might turn a 30-year repayment plan into a five-year note.
- Retirement – Geographic arbitrage as a retirement strategy is risky. By building your finances entirely around local costs of living, you are locking yourself into a certain region and local lifestyle that may not work if your long term interests or needs change. However, as a way of boosting your retirement savings while at work, it can be an excellent strategy. Move someplace where you can find a $1,000 per month difference in equivalent rent, then throw that money entirely into a SEP IRA. For a 35-year-old to start adding an extra $12,000 per year into a retirement account, that can do a world of good.
- Entrepreneurship – Starting a business in the U.S. is expensive, particularly because you can expect it to take months, if not years, before that business will begin to generate a reliable income. Many entrepreneurs have solved that problem by opening up shop overseas. If you want to start an online company, low costs of living can help you survive the early lean years while your business gets started. If you want to open up something made of brick and mortar, access to inexpensive land and materials can help make that first restaurant or hotel a far more accessible dream.
These are, of course, just three case examples. But they’re good ones, and very common.
How to Do It: Geographical Arbitrage
If geographic arbitrage sounds appealing, whether from the standpoint of finances or personal adventure, there are a few steps to take, and four are particularly important. These entail some work but can net significant benefits.
- First, confirm that you can do your job remotely
Make sure that you can work remotely for the entire time you plan on being away. Don’t simply assume that you’ll be fine just because you’ve been moved to a laptop for the time being. One of the worst case scenarios for geographic arbitrage is to move your life across the country or the world only to get an email announcing that you’re back in the office starting Monday.
Contact your employer and confirm that management has no problem with you relocating for either the short or the long term. Discuss your specific plans and confirm that this will not interfere with your ability to do your job and earn a living.
- Second, set your financial goals
Like with all financial plans, you should ask yourself what you want to achieve through geographic arbitrage.
For some people this will be a simple lifestyle answer. The intersection of remote work and a reopening world will create significant opportunities for people who want to have an adventure over the coming year. If that appeals to you, research options for digital nomads to find popular destinations that have the kind of infrastructure and reliability necessary to make this a viable option. It is also essential to remember that this will be a working adventure. Make sure you can keep your professionalism and not show up to a Wednesday morning conference call hung over from partying with the expats on a Tuesday.
Other people will want to set specific financial metrics. Do you want to pay off your student loans? Are you trying to boost your retirement, get out of consumer debt or just spend a few months building up savings? Whatever you’re trying to do, set the financial target you would like to reach. Essentially, how much money do you want or need to generate from this move?
- Third, calculate your geographic arbitrage gap
Your geographic arbitrage gap is the anticipated difference in costs of living between where you are now and where you will move to. If you have a specific financial goal, then the arbitrage gap you are looking for will be:
Financial goal / Timeline = Gap
For example, say you would like to pay off a $24,000 student loan. This is your goal. You are willing to move away for up to 18 months, and have confirmed with your employer that you can work remotely for that entire time. Your arbitrage gap would then be:
$24,000 / 18 = $1,334
If you can find a destination in which costs of living allow you to save at least $1,334 per month compared to where you are living now, you can pay off that student loan entirely through geographic arbitrage.
- Finally, select a destination
Your geographic arbitrage gap will define your search for a new place to live. Basically, you can live anywhere that allows you a comfortable standard of living at or below this gap.
However, “comfortable standard of living” will differ for everyone. The options available to you will be defined entirely by your own wants and needs, and your interest in adventure. Are you interested in leaving the U.S.? Do you have to remain within a certain distance due to family obligations? Do you have health needs? Do you have a minimum standard of living?
Research destinations that meet your personal needs and compare them to the costs of living where you currently are. Make sure that you look for someplace you would actually enjoy, otherwise you will just be signing up for a long, miserable experience (and quite possibly will quit halfway through).
Once you’ve found the intersection of personal needs and the arbitrage gap, it may be time to start packing your bags.
The Bottom Line
Geographic arbitrage is the practice of taking advantage of lower costs of living in different parts of the country – or even the world. By spending less you can make your money go further, whether you’re looking to change your lifestyle or just meet financial goals.
Tips for Investing
- The FIRE movement coined the term geographic arbitrage. Their dream might be out of reach for many people; for all their talk of clever strategies the first step of FIRE is usually “get a mid-six figure paycheck” after all. But everyone can appreciate smart, sound finances. SmartAsset’s matching tool can pair you with up to three a financial advisor in your area who can help you, whether you’re trying to achieve financial independence or just want to tighten up your portfolio. If you’re ready, get started now.
- Remote work is the most essential step of geographic arbitrage. If you can’t do your job completely online then you may not be able to pack your bags. Some cities have a relatively high number of remote workers – and one of them could be a great fit for you.
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