Hey there! Welcome to Episode 8 of my Personal finance podcast. We catch up every Tuesday to look at one interesting aspect in the world of Finance, Personal Finance, Money and FIRE, which stands for Financial Independence and Retire Early.
Today’s topic is an interesting one called Geo-Arbitrage. This is a super smart way for you to maximize savings and reduce expenses by optimizing where you live and how you spend. Let’s get into it!
Now, if you are someone on FIRE, your goals will be around reaching Financial Independence and maybe Retiring Early. In order to do this, there are two major things, ONE, you Save money, TWO, you increase your income. Geo-arbitrage is a concept that will help you save money in a truly classy and sexy way! Here is how…
You would have heard of cost or labor arbitrage in the world of business. Let’s take labor arbitrage. Say someone in US is working on a task for $12/hour, if the same task can be done by someone in Manila for $6/hour, then that would result in an arbitrage savings of $6. That in a nutshell is how arbitrage works.
Geo-arbitrage is when you leverage your access to different geographies to minimize expenses and maximize your savings that way. Simply put, you live in an area where the cost of living is substantially lower. You do this while earning from an area that pays you more due to the cost of living being higher there.
Example of how geo arbitrage works
Let’s put that into a real life context. Let’s say you are a web designer who works remotely living in New York, earning $5000 a month. Your expenses in New York is high, costing you $4500 per month to live and allowing you to save just $500. Now, if you were to continue working on your remote web-design job and relocate to a remoter suburb, or say even a different country such as India, then you save a lot. The cost of living in India would be much lesser, you would probably get to live the same or even a much better standard of life than in New York on $1500, allowing you to save $3500 per month.
Now, Geo-arbitrage can be great when you are trying to save money. But, it does not stop there. It is also another great option at the time of retirement. If you have been living in New York all your life and saving in dollars, those dollars saved will get you a much better lifestyle and bigger bang for the buck in Thailand or Malaysia, for a longer period of time.
What contribute to cost of living
So the main concept of looking at geo-arbitrage in FIRE is to bring down the cost of living, what are the main costs involved here? Majority of your money anywhere on earth will be spent on
- shelter and
- lifestyle. Lifestyle will include clothing, entertainment, yes Netflix too (sadly Netflix is not cheap anywhere on earth!), transportation and leisure.
Things to consider when relocating to save money
Saving money is one thing, but you should consider a number of other things such as medical facilities, cost of good quality medical help, schooling for your children, weather, political scenarios, crime rate and law, taxation etc. These are important when you take a decision to relocate. The last thing you want to do is to end up in a place you hate just to save money or to live in early retirement.
Crime and politics is a big deal when taking this decision to relocate somewhere else. Also think about natural calamities and environment.
No, geo-arbitrage does not necessarily mean that you move to a different country. You can look at a cheaper city. In India for example, the metros are ridiculously expensive. Take the housing in Mumbai for example, you pay an arm and leg as rent. Moving to a cheaper suburb would save you a tonne of money.