(or “Strategies for Life in a High Cost of Living Area”)
A few months ago I spoke with Cindy M., a mother working in the high tech industry in the San Francisco Bay Area. She told a story that has stuck with me for several months. She earned around $200,000/year. Her husband was a stay-at-home parent. She felt as if she were just barely getting by, and that made her feel ridiculous. $200,000 is So Much Money! How could she possibly have any money worries! She confided this to a financial therapist, and the therapist countered: “In the Bay Area, $200,000 is basically middle class.”

This one shift in perspective made her feel better. Turns out that, no, she was not doing anything wrong, and neither are you. It is expensive to live in the Bay Area, and many of the other tech hubs like Seattle or Boston. Perhaps you have unconsciously set your money baselines at your parents’ income in your youth, or at your friend’s income in Louisville, KY. To get a reasonable sense of your own finances and the possibilities, you need to recalibrate to your reality.

Sperling’s Best Places compares cost of living in many American cities to the national average (set at 100). Walnut Creek, CA is 205. Seattle is 154. Denver, CO is 115. Minneapolis, MN is 108. Savannah, GA is 83. If you live in Walnut Creek, you have to spend more than twice as much as your counterpart in Savannah, GA for the same standard of living.

Maybe you feel like you should be able to reduce your expenses so you can save more of that So Much Money. This isn’t a budgeting piece. Skipping your twice weekly latte isn’t going to get you far when your mortgage is $3000/mo or more. In a lot of tech hubs, housing is your biggest unavoidable cost. Let’s look at some long-range strategies focused on your housing. We will call them Plans A, B, and C.

Plan A. Stay where you are, in your high cost of living area, where all dollar amounts (income, spending, and saving) are multiplied by 2 (or 3). You will have the same standard of living as if you’d chosen a lower cost of living area, with a similarly smaller paycheck. Sure, it might seem insane that a $200,000 income doesn’t get you any more than middle-class existence, but it’s all relative, isn’t it? The biggest challenge with this strategy is probably going to be simply reconciling yourself to the fact that your salary, though (crazy?) high, is not going to make your finances a cake walk.

If you follow this plan, make sure that all your dollar amounts are multiplied by 2 (or 3). You can’t earn twice as much as your friend in Minneapolis but save the same $18,000 to your 401(k), and then expect to have the same financial future. Also remember that, in retirement, Social Security is going to play a much smaller role in your finances than it will in your Minneapolis friend’s finances: Social Security retirement benefits have a monthly cap that will be a smaller percentage of your retirement income. You’ll need to make up for that difference in your own savings. In general, you probably want to take rules of thumb with a large grain of salt if all your dollar amounts are so skewed from the national average.

Plan B. “Cost of living arbitrage.” That is, plan to move to a place that costs less after milking the benefits of your higher salary. All those cities listed above…I’ve visited them (or at least driven Really Close). They’re nice. And many people call them home and love them. Maybe you could, too? If you live in Walnut Creek with your high salary, and you save twice as many dollars as your friend in Minneapolis (and have twice as much home equity), then in a few years or when you retire, you can move to Minneapolis and have a lot more options than you could in Walnut Creek. Even better in Savannah, GA (mmmm, pralines). Haven’t people done this for years, retiring to Mexico or Costa Rica, on a US pension? The ultimate, of course, is living in an inexpensive city and working remotely for a company located in a high cost-of-living area that pays you the salary of its local employees.

The big danger in this plan is that you won’t ever actually move. People have a life, friends, and family where they live. And you’ll always want to stay “just one more year” to get a little more money or to do this one more thing. Planning to move far away needs, well, a plan. You gotta do some spade work, some research. Pick out some places you might want to live. Go There. Make that destination real. Write down specific dates and specific numbers. Or work with a financial planner to do that. Much like using an Investment Policy Statement guides your investing decisions, you need to make a plan for your life in calm, rational times so that you stick to it in difficult, irrational ones.

Plan C. Hope for a “liquidity event” in your company–IPO, acquisition–that’ll give you the longed-for “F-you” money. I fear far too many people are following this strategy, consciously or not, when in reality it only works out for a few, and you can never predict whom it’s going to happen to. (Much like picking investments or investment managers. Sure, some of them always beat the market. But you can only ever tell which ones will after they’ve already done it.)

The danger of this strategy should be obvious: Statistics aren’t on your side. The vast majority of people in the tech industry simply don’t receive life-changing amounts of money in one fell swoop. In my career in tech, I had one liquidity event. Almost a decade ago, I exercised all my cheapest incentive stock options after I quit a private company. About three years later, it got acquired, and I turned a sweet 800% profit. Yep, I turned my $300 investment into $2700. I think I did a muted happy dance and simply put it in savings…

Whether or not you’re aware of it, you’re certainly already following one of these strategies. All I want you to do is to make it intentional. Make a plan for it.

If you are interested in learning about how I can help you take advantage of your home equity or your high salary, or help you plan to relocate in the future, please contact me at meg@flowfp.com or schedule a free 30-minute consultation.

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