Hello everyone! Please welcome Kali from Common Sense Millennial here today, sharing with you the benefits of living in a low cost-of-living area. She provides a very thorough analysis for any of you considering it. I thought this topic was appropriate as you all know I’m looking forward to moving for the sake of our long term goals. You can find my post about how I’ve been dealing with my student loan debt over at her blog today, and if you aren’t a current reader of hers, you’re missing out! CSM is one of my favorite blogs.
The benefits of living in a low cost-of-living area
The cost of living can vary wildly within the United States. Simply by moving to a different region, households can save thousands of dollars per year on home costs, groceries, and transportation. As an example, compare living in the South with living in the North: both regions are on the East Coast, but the differences in cost of living are significant.
Though families who have always lived in the northeastern part of the country may not think much of the suggestion to relocate farther south, there are real financial benefits to doing so. As a resident of a southeastern state myself, I can confidently say that I save far more on the cost of my home and other necessary expenses than my Northern counterparts do. And because of this, I’m able to save more of my income.
This is the biggest advantage to living in a low-cost area: having more money to save and invest. Because I have to devote less of my income to my expenses, I’m able to put more away in the interest of reaching financial independence as soon as possible.
Not convinced? Let’s do a budget breakdown of someone like me, who lives in Georgia and who we’ll call Country Peach, and her Yankee cousin, who, for the sake of this example, lives in a place like Washington, D.C. (because let’s be honest: us Southerners aren’t likely to be found all that far from the Mason-Dixon line in most cases). We’ll call the “northern” gal Miss City Chic.
We’ll assume that both our ladies here are in their early twenties with college educations. They both graduated with Bachelor of Arts degrees from relatively inexpensive colleges down in Georgia (another benefit to living down here, folks – my own college tuition, when I was in school from 2007-2011, was about $3,000 per semester).
After graduation, City Chic moved north, to D.C., while Country Peach stayed in her home state. Both got entry-level jobs shortly after leaving school – and here’s where the differences start. Country Peach got a job working in an office in the Metro Atlanta area and started earning about $38,000 per year. City Chic, because she lives in a bigger city with (arguably) better jobs, got an entry-level position that started her at $42,000.
It seems like City Chic made a smart decision to move to another city where she immediately starting out by making more. But let’s look at their expenses and see if that advantage holds up.
The Cost of Housing
Both Country Peach and City Chic are independent ladies, so they both decided to get one-bedroom apartments where they could live without roommates. Peach gets an apartment about ten miles from her work and pays $770 per month in rent. Chic also gets an apartment that is also about 10 miles from her office and pays $1,370 per month – a whopping $600 difference right off the bat. Over a year, Peach’s housing will cost her $9,240 while Chic’s place costs $16,440. That’s nearly twice as much.
(Both women could choose to split the rent with a roommate and move into a two bedroom apartment, but Chic still comes out on the bottom. Peach could get a place with two bedrooms for about $900 a month, or $450 if she split the rent with someone, while Chic would have to shell out $1,500 – or $750 with an even split – and deal with the joys of sharing a living space. Peach would still be up $300 per month. Yearly totals would be: Peach – $5,400 / Chic – $9,000)
Maybe Chic can make up for her more expensive place by saving on transportation – after all, by living in D.C., she has access to the Metro and bus system that she can ride if she wants (or if the weather is bad). To save time, however, she chooses the bus and rail system 90% of the time. She buys a SmarTrip card, which costs $2 for the card, and regularly loads it with money to pay her fare. It costs her between $20 and $40 per week to ride the buses and trains, depending on where all she needs to go. Let’s give her an average of $30 a week, or $120 per month, or $1,440 per year.
(Also, Chic sold her car when she moved to D.C. This isn’t a problem most of the time because the city has solid public transportation. But if she wants to travel outside the city, she’ll have to pay for a plane ticket back home to Georgia. These are discretionary costs, to be sure, but it’s something to consider. Let’s say Chic makes two trips per year back home – for Thanksgiving and for Christmas. Both her round trip, direct flight plane tickets from Regan International to Hartsfield-Jackson cost her a total of about $750. Her total transportation costs for the year if we include travel back home without a car would be $2,190).
Let’s see how our girl down South is doing on transportation. Atlanta has Marta as its public light rail and bus system, but it only operates within the city and is not very useful unless Peach is going to a sporting event or something else going on downtown. Most people “in Atlanta” also live in the Metro area, not the city itself, so undoubtedly Peach needs a car to get around. She has a small sedan she was given in high school that is pretty good on gas mileage. She drives twenty miles per day (round trip) on work days, and averages a little less on the weekends to put her driving about 115 miles per week or 460 miles per month – but let’s round that up to an even 500. With gas prices in the Metro area at about $3.20/gallon right now, and with Peach’s car averaging 25 miles per gallon of gas (with a 12-gallon tank), she ends up paying $64 per month in transportation costs.
Well – almost. She has to pay to maintain that car, too. Let’s say she needs 3 oil changes per year at $60 per service for a total of $180. Then she has to pay for car insurance, which runs her about $100 per month (and $1,200 per year). Her total yearly transportation costs are about $2,200.
If we assume Chic’s transportation costs would include her daily expenses plus two trips back home, her and Peach’s transportation costs average out to be the same with Chic winning by $100.
Groceries, Personal Items, and Entertainment
Both Peach and Chic have similar lifestyles. They’re not the most frugal people in town, but they do know they need to save their income for big financial goals and for future needs like retirement.
Peach pays about $150 per month for groceries and spends $60 per month eating out. Her food budget is $2,520 per year. She spends about $150 per month on personal items, including things like toothpaste, shampoo, household cleaners, and clothes – or $1,800 per year. She also makes room for entertainment and fun in her budget; her discretionary spending on things like movies, going to baseball games, and going to things like concerts with friends adds up to about $300 per month/$3,600 per year. In total, Peach spends $7,920 in these categories in a year.
As we established, Chic buys and does pretty much the same things as Peach, but her location makes her budget look a little different. Washington, D.C. is the 8th most expensive city in which to live in the United States, so her discretionary spending will reflect that. Her grocery bill is $180 per month, or $2,160 per year. She spends the same – $180 per month – on personal items, for a total of $2,160 per year, and her entertainment costs are at $350 per month, or $4,200 per year. Her total for these budgetary categories comes to $8,520.
Peach spends about $600 less per year on groceries, personal items, and entertainment.
*In this section, I based numbers off averages and my own personal experiences, and what I was spending in my first year of holding my full-time “adult” job after college.
Don’t Forget the Income Taxes
Chic and Peach both work for regular ol’ businesses, so they pay state and federal taxes. But taxes vary depending on where you live – and Chic still has to pay local taxes, even though she lives in a district and not an actual state. Let’s break this down for each of them.
Falls into the $35,351 – $85,650 tax bracket for federal taxes and pays 25% ($9,500)
Falls into the $7,000+ tax bracket for Georgia and pays 6% ($2,280)
Total Paid in Taxes: $11,780
Falls into the $35,351 – $85,650 tax bracket for federal taxes and pays 25% ($10,500)
Falls into the $40,001-and-above tax bracket for the district and pays 8.5% ($3,570)
Total Paid in Taxes: $14,070
Looking at the Totals – What’s Left for Savings?
In total, Peach’s basic expenses plus what she pays in taxes comes out to $31,140. Remembering that her salary is $38,000 per year, she’s left her with $6,860 to put into savings.
If Peach chooses to save a little more by sharing a two bedroom apartment with a roommate, her expenses would come out to $27,300. This would allow her to save $10,700, or about 28% of her salary.
Obviously, Chic really can’t avoid to fly back home on her own dime, so let’s cut her some slack and say her parents miss her so much they’re willing to fly her home for the holidays. Reducing her expenses by $750 – the cost of her flights – puts her at $40,470.
This still leaves hardly anything to save, so let’s move Chic in with a roommate like we allowed for Peach. Splitting the rent evenly puts Chic’s total yearly expenses at $34,560. This is a much more comfortable number and one that would allow her to save $7,440, or about 17% of her salary.
This means that by living in an area with a lower overall cost-of-living, Peach is able to save almost double what Chic is able to, even though they maintain the same sort of lifestyle. Clearly, the biggest thing that is hurting Chic is the cost of her housing.
Obviously, this example got simplified for the sake of not making this post any longer than it already is. I used averages for my figures, I understand taxes aren’t as simple as I made them seem, and I know the cost of housing can vary widely in and out of your favor (for example, when I had an apartment in the Metro Atlanta area I only paid $600 for a one bedroom, not $770).
Not to mention, other costs of living that you have control over – like discretionary spending and utilities – will vary based on your lifestyle. But that’s why this was simply an example, and it should give you an idea of how the benefits of living in a lower cost-of-living area can make a difference. You have the potential to make just about as much and save even more!
Do you have experience with living in a very low-cost – or inversely, a very high-cost-of living area? How did it make an impact on your savings and did it change how you worked toward your financial goals?