In last month’s post on the best ways to spend less, I noted that housing is by far the biggest piece of the average American budget, representing one-third of typical household spending. The best way to cut your costs (and, therefor, boost your profit margin) is to reduce how much you spend to keep a roof over your head.
One obvious option is to choose a cheaper house or apartment. But if you truly want to slash your spending, consider moving to a new neighborhood. Or city. Or state. If you’re willing to change locations, you can supercharge to your purchasing power and accelerate your saving rate.
While Kim and I are in Savannah, for instance, we’re spending much less than we would for the same lifestyle back home. According to the CNN cost-of-living calculator, Portland is nearly 37% more expensive:
Cost of living is one of those factors that few people consider, but which can have a huge impact on the family budget — sometimes in unexpected ways. According to The Millionaire Next Door:
Living in less costly areas can enable you to spend less and to invest more of your income. You will pay less for your home and correspondingly less for your property taxes. Your neighbors will be less likely to drive expensive motor vehicles. You will find it easier to keep up, even ahead, of the Joneses and still accumulate wealth.
It’s one thing to talk about the effects of high cost of living, but another to actually experience it.
Cost of Living in Real Life
On our road trip across the United States, Kim and I have had fun watching how prices vary from city to city and region to region.
While stranded in rural Plankinton, South Dakota in July, for example, I paid $10.60 for a fancy men’s haircut. At home in Portland, I pay $28 for the same fancy haircut. In June, I paid $30 for a haircut in Fort Collins, Colorado. In Santa Barbara, California, I paid $50 or $60 for the same fancy cut.
Gas was cheaper in South Dakota too. So was food. So was beer and whisky. So were movies. So was just about everything, including housing. Housing prices followed a similar pattern to the haircut prices I mentioned above. A $280,000 home in Portland might go for $300,000 in Fort Collins and $500k to $600k in Santa Barbara. In South Dakota, that same home would cost about $106,000.
I’ve been exchanging email with a Money Boss reader who has first-hand experience struggling with the high cost of living. She gave me permission to share her story:
I had been saving about 40% of my relatively modest salary for eight years. I had built up an emergency fund as well as a good sized savings…and then we had kids.
We lost our rent-stabilized apartment right after our children were born. We live in New York City, and while I maintain that there are many things about the city that are actually very budget-friendly (public transit and free entertainment top my list), the cost of rent and daycare in NYC are over the top.
In one year, the cost of a market-rate apartment in our neighborhood plus two kids in daycare ate into my hard-earned savings. By the end of the year, the pot of money that I had worked so hard to save was down by almost $50,000.
Luckily, my husband and I have never carried any kind of debt and had already been living well below our means before the kids came along. But that also meant there was very little fat left to trim in our budget other than rent and daycare expenses. (We’d already dropped the landline, never had cable, cooked almost all of our meals at home, and cut out our modest “allowance” of $50/month for splurges.)
We are the very definition of penny wise and pound foolish!
Eventually, we moved into a cheaper apartment. Although we haven’t had to dip into savings since we moved, we’re still essentially living month to month because of daycare and rent. The neighborhood is cheaper for a reason.
Real Life will force us to make another move in the spring. One of our jobs is going away, so it will force a decision one way or another since we can’t stay in New York on one salary. Change is definitely coming.
This reader and her husband are already frugal-minded — that’s how she built her buffer of savings to start with — so there’s not much more the family can cut. They’ve moved to a cheaper apartment, which has allowed them to tread water instead of begin drowning in debt. But her husband’s job ends in the spring, and there’s no way they can stay in New York on one salary. They must find a city with a lower cost of living.
Saving in Savannah
Which places are cheapest to live? Which are most expensive? This map from Governing magazine shows how far the average paycheck goes in 191 U.S. metro areas.
Dark green (blue?) dots indicate cities where your wages buy more after adjusting for cost of living. Dark brown dots are places where you have to work harder to get what you want. (Click through to play with an interactive version of the map.)
As you can see, large coastal cities tend to be more expensive than smaller towns in the center of the country. If you have a fixed budget, you’ll get more bang for your buck by buying a home in Oklahoma City or Sioux Falls than by living in San Francisco or Washington D.C.
It’s not just coastal cities, though. There are spendy pockets throughout the U.S. from Flagstaff, Arizona to Hot Springs, Arkansas. And some coastal cities — Boston, Houston, Seattle, Tampa — are relatively inexpensive. (In Boston and Seattle, though, that’s because wages are high, not because things are cheap.)
In larger cities, there are even differences between neighborhoods. When Kim and I decided to stay in Savannah, for instance, we had a choice:
- We could rent a small apartment in the downtown historic district for $1750 per month. The place would have been a lot of fun because it was surrounded by shops and restaurants, and it was close to anything we might want to do.
- We could opt instead for a modest-sized condo on the outskirts of town at $1325 per month. This location was next to nothing. We could walk to the grocery store, but we’d have to drive into the city if we wanted to indulge ourselves.
After considering financial and lifestyle factors, we chose to rent the condo in the middle of the marshlands. On the surface, this decision saved us $425 per month. In reality, it saved us much more than that.
If we lived downtown, we’d have to pay to park the Mini Cooper ($95/month). We’d constantly be tempted to eat out or go for drinks. It’d be too easy for window shopping to become actual shopping. Instead, we enjoy one Date Night each week. We spend the rest of our time working and exercising.
I believe that opting for the less glamorous location will save us a minimum of $5000 over our six month stay — and the real savings are probably far greater.
The Bottom Line
Obviously there’s more to picking a place to live than pure price.
When you choose a city to call home, you do so because of the climate, the politics, and the people. You want to live close to friends and family. You want a nice school district. You want people who think and act the same way you do. For those reasons (and others), Omaha might not be a good choice for you. (Savannah isn’t a good choice for me long-term, but it’ll do for a few months.)
But here’s the bottom line: Where you choose to live has a greater effect on your long-term financial success than almost any other factor. How much you earn is sometimes more important (not always), in which case cost of living is a close second.
Cost of living can wreak havoc on your pursuit of financial freedom. Or it can help you achieve your goals sooner than you thought possible. The choice is yours.
Other ways to make the most of your housing budget? Consider renting. Live close to where you work so that you can walk, bike, or take the bus. Purchase a house that fits your lifestyle and needs rather than the commonly cited “buy as much home as you can afford”. The latter is self-serving advice from real-estate agents and mortgage brokers. You don’t need a big house; you just need someplace comfortable.