What you can earn and what you pay to live and inextricably tied to where you live. That statement is generally true — but it’s being challenged more and more. New trends like digital nomadism or financial independence retire early (FIRE) that challenge traditional ways of living and earning an income.
And geoarbitrage is the financial strategy at the heart of these location-independent lifestyles.
What Is Geoarbitrage?
Geoarbitrage, a portmanteau of “geographic arbitrage,” is a strategy to leverage low-cost areas to boost your quality of life or simply save money.
This concept was popularized by Tim Ferriss in “The 4 Hour Work Week: Escape the 9-5, Live Anywhere, and Join the New Rich.” In the book, Ferriss introduces geoarbitrage as a way to buy a higher quality of life by living in low-cost countries. As he puts it, “Earn dollars. Live on pesos. Compensate in rupees.”
Geoarbitrage: A Financial Tool to Increase Discretionary income
Over the years, geoarbitrage has shifted to focus mostly on “earn high, live cheap.” It does this by taking advantage of the geographic differences in the prices of your labor and your living expenses. Typically that’s through a combination of:
- Maximize earnings by getting a job, providing services, or selling products where they’re worth more
- Minimize costs by living in an area with low prices
This increases discretionary income, giving you more funds to achieve many financial and lifestyle goals: pay off debt, save for retirement or financial independence, travel the world, and more.
Here’s a look at how to accomplish each step.
Find location-independent work
Thanks to the rising prevalence of remote work and online business, you no longer have to accept living in an expensive city to access high income. Taking the step to find location-independent work can be a smart way to access higher earning opportunities, without having to move or live somewhere expensive to achieve that.
The internet can connect you to a market of clients, employers, or customers who are willing to pay you more. Common forms of location-independent income include:
- Remote work: Finding a job that allows you to work remotely, from anywhere. Alternatively, you can also try to negotiate with your current employer for the ability to work remotely full time.
- Freelancing: Offer your services as a freelancer or contractor. Many contracting jobs can be completed digitally or remotely including creative, administrative, accounting, software development, or research. Start building your skills and your client list for a freelancing business.
- Selling products: Lastly, you can develop and sell products. These can be your intellectual property, such as e-books, online courses, printables, photographs, or art. You can also earn money off of IP through advertising, affiliate income, or other revenue streams.
Live somewhere cheap
The other half of the geoarbitrage equation is where you live. This could be the low-cost area you already reside in, or another city, state, or even country you could move to. Here’s what to look at when choosing where to live:
- Living costs: Look for areas with lower local prices on housing, food and groceries, utilities, transportation, and child care. Use a cost of living calculator to compare the differing prices between each city.
- Compare tax codes: State and local income taxes can add significant costs — or savings — to your net income. They’ll also impact living costs through transactional or property taxes.
- Account for changes to lifestyle: You might need or have the opportunity to change your lifestyle in this new place, which could impact your expenses. Will you need to buy a car, when you don’t need one now? Or could you buy a larger home and rent rooms out to roommates?
- Consider quality of life: Lastly, compare how each place could improve your life. Maybe you can live in nature, or closer to your family or support system. Set some nonfinancial criteria for where you live that will allow you to have more of the life you want.
My Geoarbitrage Experience: Moving from Los Angeles to Salt Lake City
I’ve personally leveraged geoarbitrage to lower my own living costs and raise my quality of life.
I was living in Los Angeles in 2016, and had just had our second child — and he came with a stack of added costs. Between childcare for another kid and the need to move to a bigger apartment, we were looking at an extra $2,400 month in costs.
We did the math, and we could technically afford this extra $2,400 a month in costs. But it would take us from making solid progress toward financial goals like paying off debt and saving up for a home, to living paycheck-to-paycheck.
It made sense more and more to move, so we each started looking for remote jobs that would facilitate that goal. I found a remote job first, and we set our plans to move in motion. My husband then negotiated with his employer to work remotely, though as an independent contractor.
Overall, we got huge lifestyle upgrades in Salt Lake City for $3,600 less per month. And our incomes have continued to increase since moving here. Having more discretionary income has helped us achieve some big money goals: buying our first home, saving a 6-month emergency fund, and paying off our non-mortgage debt.
Deciding if Geoarbitrage Is Right For You
Not everyone has the option to pick up and move or take their work online to find higher-paying markets. But if you do have the option to relocate or earn more? Geoarbitrage can be a powerful tool to grow discretionary income and build wealth.
Even if you can’t, however, you can still use the principles of geoarbitrage to improve your finances. After all, it’s just an extreme version of growing income while keeping costs low.