It’s curious how Americans seem to find it normal and acceptable that not just particular neighborhoods but whole regions of the country are off-limits for you to live in unless you make more money than most people. This economic situation is of recent provenance, and is getting steadily worse, which makes me wonder: is the strategy embraced by many not-so-affluent people moving to cheaper areas ultimately a loser’s trick, dooming its users to runaway marginalization and defeat in the game of life?
I feel this reality perhaps more keenly than most people, since I currently live in one of these vaunted “low-cost-of-living areas” in the United States and find that it truly sucks. I need to be somewhere much better and more glamorous, filled with beautiful scenery and beautiful people. A place befitting the influencer lifestyle and look everyone seems to heap hatred upon (for reasons that baffle me, unless it truly is jealousy all the way down) but I for one find aspirational. To do all that I need to make a lot more money, which in my own somewhat lazy way I try to do.
The Long Arm of the Expensive City
That might not be your aspiration. Nevertheless, I suspect I might be a canary in the coal mine for the rest of you. Even if you’re content with living in what are now cheap, low-cost areas, who’s to say they’ll stay cheap? Colorado was once a cheap alternative to California; it really isn’t anymore. The fact that since around 2020 real estate prices are skyrocketing across the United States, on track to eventually converge with California’s, isn’t exactly promising if you’re depending on geographic arbitrage to bail you out of the poorhouse.
The cruel fact is if you’re not keeping up with inflating living costs in the most sophisticated parts of the world, then important and powerful parts of the globe will be closed off to you, and here’s the kicker: if you keep falling behind, the amount of the world you’re priced out of will inexorably grow with time, marginalizing you more and more until you’re totally irrelevant and have access to nothing, barring perhaps ghetto-level areas
They’d never admit it, but those who have embraced the path of “downsizing” from expensive cities into cheaper areas have chosen that as the default future for themselves and their children: downward mobility.
That’s not to say that living in a cheaper area is bad. Geographic arbitrage is genuinely useful for improving living standards and building wealth; there’s also no particular reason you should live in a high-cost area if there’s a lower-cost one you like better. But the point is if your means aren’t keeping up with the cost of living in the world’s power centers you’re moving in the wrong direction financially, regardless of what your local cost of living is doing.
What is the Benchmark?
The median one-bedroom apartment in New York City rents for $3100 a month, in San Francisco $2930 a month. Per the 30% rule, to afford these prices you need to earn $124,000 and $117,000 a year, respectively. The median two-bedroom apartment in New York City rents for $3300 a month, San Francisco $3970 a month, necessitating earnings of $132,000 and $159,000, respectively. Keep in mind these are median rents; the median apartment in these cities isn’t exactly luxury living. Rents in these sort of places doubled over the course of the 2010s, outpacing increases elsewhere; in terms of outpacing increases elsewhere the 2020s so far have been more ambiguous due to the lockdowns and the rise of remote work, but lately the high-cost-of-living areas’ outperformance has been coming back with a roar, suggesting the secular trend might continue.
Home prices too paint a stark picture of affordability. San Francisco’s median home price is $1.6 million. At today’s mortgage rates of 4.24% that means you’re paying $7862 a month in principal and interest. Including taxes and fees that comes to some $10,528 a month. To afford that monstrosity, per the 30% rule you’ll need to earn at least $421,000 a year. And it’s not specific to San Francisco; many world-class cities have joined the seven-figure-home-price club. These are the sort of numbers you’ll need to meet if you want to live in any city of your choice.
Clearly that won’t be feasible with an ordinary job. The median American household brings in perhaps $70,000 a year, and that’s with the tailwind from all those wives working. Per working person the median is even less than that. On the other hand, the median family headed by a fiftysomething breadwinner, i.e. peak earning years, brings in around $100,000 a year, which might be just enough to make a cheaper housing unit in the highest-cost cities work. Depressing, eh?
The Goal is Revealed
What you really need is not limping past the $100,000 mark with dual incomes, but rather to get into something that provides income on the order of mid-six-figures or greater, ideally long before you reach age 50, when you’re young enough to really enjoy all that a world-class city has to offer. Now comes the hard part: how do you do that?
I don’t have any easy answers for that. I would point out, though, that these numbers suggest a startling conclusion: that you should eschew any career path that doesn’t have at least mid-six-figure earning potential.
Mid six figures, interestingly, is the realm where investing and business ownership start to overtake working as an employee as the most surefire path to getting there. Even the employees who do earn at that level don’t earn their pay in the form of steady income; commissions, bonuses, and stock options are ubiquitous in this realm. Perhaps “job security” truly is a siren song, as I wrote here last year.
The closest thing I have to an easy answer is to invest in leveraged stock market index funds, the highest-return strategy available to average buy-and-hold investors; they appreciate enough over the long term to outpace cost of living, and thus will ensure you will reach the “I can live well in any city I want” level eventually. The problem is that investing $1000 a month, the most a middle-income family might be able to spare, will on average only get you there in 30 years; even $4000 a month only accelerates it to 20 years. Which if you start out in your early twenties might get you there sometime in your forties. Not ideal, but close enough to be intriguing, and in any case probably by far the best shot most people have.
Getting into a lucrative field of business allows you to jump-start your income far faster than compound interest would ever allow you to, so vague as it is I suspect something along those lines is the optimal path. Truly optimal, of course, is to combine the two strategies: rake in the income from working a business, and shovel the proceeds into a maximally aggressive investment portfolio.
Considering the pittance I make from anything other than my investment portfolio, that smacks of “do as I say, not as I do”, but eh, I can only assume you’re reading this because you think my takes add some kind of value to your life. Besides, I hope to get onto something like this path myself once I achieve some more personal goals this year, which is why my mind turned to this topic in the first place. Long story short: downsizing out of the more desirable areas as you fall behind is a loser’s trick in the game of life; what you really need is to make more money. Give it your best shot!