One of the core tenets of the FIRE philosophy is to keep your expenses to a minimum. It’s easy to then logically conclude that you should live in a low cost of living area and avoid a high cost of living like the plague. Is this true?
Yes and no.
As with most things in life, there’s nuance here. The answer isn’t as cut and dry as it may seem.
Living in an expensive area or city is a magnifier of your habits. If you’re naturally a spendthrift, the city will provide you with ample opportunity to spend money on shiny things and the latest fad restaurants. If, however, you’re dedicated to FIRE (financial independence, early retirement), living in an expensive area can be a boon for you.
There are three concepts that you must optimize if you want to leverage a high cost of living area to retire even earlier. I call these the “3 FIRE Accelerants” and if you’re smart, you can leverage them to make that day when you don’t have to go to work arrive sooner.
Like real fire and a real accelerant, leveraging these 3 Fire Accelerants yields explosive results.
The 3 FIRE Accelerants
One of the more obvious advantages of living in an expensive area is that typically your earnings are higher.
If you make $30,000 per year in the suburbs or a rural area, perhaps you’ll make $50,000 in a large expensive city.
This, however, is not guaranteed. If moving to a high cost of living area does not come with a reasonable expectation of salary increase, don’t do it.
The magnitude of this salary increase relative to the increased cost of living is vitally important. If City B costs twice as much as City A to maintain a similar standard of living, a measly 5% increase in earnings is actually a pay cut.
More Savings & Investments
The city offers a lot of tempting new experiences and sexy gizmos specifically engineered to seperate you from your hard-earned cash.
If you are paid a higher salary but you spend all of it, there’s little sense in continuing to pursue early retirement. You’re not going to get there with this approach.
If however, you saved 50% of your paycheck when you were making $50,000 per year ($25,000 saved per year), you do not NEED TO also save 50% of your paycheck at a $100,000 per year salary to make the move to a more expensive area accretive to your goal of financial independence.
Technically, if your savings rate decreases from 50% to 26% but your salary doubles, you’re still coming out ahead!
This isn’t an excuse to let yourself off the hook. While the math may work out for you in this circumstance, push to save as aggresively as possible and never settle for slightly better than before.
What if you continue to save 50% of your income (or more) in a high cost of living city along with a significant increase in earnings power?
Early retirement will sneak up on you sooner than you expected.
In my prior life as a soldier, “retrograde” was a fancy word for “retreat”. As in, something you don’t want to do.
In the context of this discussion, though, retrograde is an extremely important accelerant to shorten the amount of time before you can retire and/or increase the quality of your life in retirement.
So, what the hell am I talking about?
Once you “make your nut” and have enough passive income to cover all of your expenses, retreat back to a lower cost of living area!
If you need $5,000 per month to retire in Los Angeles, how much better will your purchasing power be in Louisville, Kentucky?
Conversely, how much earlier could you retire to maintain the same standard of living if you moved to Louisville? Could you instead use a lower passive income than $5,000?
Maybe you’d like a mix of both and keep working past the point when you can retire in a cheaper city so that when you do quit the expensive city life, you can retire with a higher standard of living elsewhere.
Use retrograde to your advantage: punch your ticket earlier, live a more comfortable lifestyle, or do a combination of both!
What are some other advantages of living in a high cost of living area? Would you consider using these strategies? Why or why not?