Article 8 min read

HCOL vs LCOL: what is best for your finances?

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Having a manageable cost of living is one of the biggest spending categories for those of us pursuing financial independence or just trying to get our finances together. If you have a high cost of living, it can mean that more of your paycheck going towards the basics and not towards debt or investing.

We're going to explore the different definitions of HCOL vs LCOL and how it can affect your personal finances. There is also some opportunities for those of us willing to get creative to try and take advantage of HCOL places (that tend to pay higher) to accelerate our path to financial independence.

Definition of Cost of Living

For our purposes we will define cost of living as the base expenses you have to buy the essentials of housing, food, transportation, child care, etc. Essentially all of the items that require you to operate in society. Normally other non-essential purchases like subscriptions or shopping aren't factored into whether a place is considered high or low cost of living.

Now, it may need to be said that just because a place is cheap to live, doesn't necessarily mean that everyone there is living a low cost lifestyle. There are obviously still many factors depending on spending habits. Likewise you can find ways to live a cheaper lifestyle even in a high cost of living location. For the most part we are trying to work with average costs here to get an idea of the difference between HCOL vs LCOL.

Definition of HCOL

The acronym HCOL stands for high cost of living. This is a place that is known to be expensive to live. The rule of thumb I personally use is a location where the average rent is somewhere above $1700 per month. In HCOL cities both rent and prices of goods tend to be higher as well, which drives the cost of living higher as well.

Examples of HCOL cities:

  • Seattle
  • Los Angeles
  • New York City
  • London

High cost of living cities are typically larger and the cost of living is often offset by higher wages. Even though a place may be expensive, you can often make more money to try and offset your living costs.

Definition of LCOL

The acronym LCOL stands for low cost of living. These locations are somewhere that are known to be inexpensive to live. My rule of thumb is that you can rent a decent place for $1,100 or less per month.

Examples of LCOL cities:

  • Louisville
  • Chattanooga
  • Indianapolis
  • Boise

As you might imagine, wages tend to be a bit lower in a low cost of living city. Purchasing regular good like groceries also are lower so that is something to consider as well.

Factors for choosing where to live

When choosing a place to live most people think of three different categories of factors: weather, financial, and social. There can be more factors like proximity to activities but for the most part these 3 categories make up the vast majority of how someone decides where they want to live.

Weather vs cost of living

How much you let weather factor into your decision is almost always purely personal. There are many who never want to see snow versus others who hate hot weather. Most weather factors include:

  • Average temperatures
  • Do seasons change?
  • Is there snow?
  • Humidity

It should be noted that places that are considered to have "good" weather (ex: Los Angeles) tend to be on the more expensive side. The fact is that more people are attracted to 70 degrees year round, so more people move to that location. Compare this to the Midwest that sees snow 4 months out of the year and you will notice the prices are lower.

Social

In my opinion, the social aspects of choosing where you want to live are nearly as important as the financial. If you don't have a solid social foundation, even if you are making a lot of money you likely won't enjoy living where you are. Likewise, having a solid social circle of friends and family can make any location enjoyable, even if you might prefer somewhere else.

The social aspects of living can outweigh other details. If you want to be close to family you might be willing to compromise on financial or weather factors if it is important to you. Some social factors are:

  • Do I have friends or family nearby?
  • Can I make friends easily?
  • Are there people with similar interests
  • Political attitudes

When choosing where you want to live, think heavily on this social category. For those of us interested in being financial independent, we often get blinded by the numbers. The reality is that there is a lot more to place than just the numbers and they should be considered in your calculation.

Financial

For the purposes of this post, we will focus mostly on the financial aspects of choosing a place to live. Financial factors include:

  • Salaries for your career
  • Cost of housing
  • Cost of goods
  • Cost of healthcare
  • Cost of daycare
  • Transportation costs

As we've discussed before HCOL places are going to be more expensive in most, if not all, of these categories. The trick then becomes trying to compare the financial differences between two cities. Just because you have a higher salary in a HCOL city does not mean that you will be taking home at the end of the month. The calculation I like to use to try and figure out if a higher salary is worth it is:

Monthly take home after taxes - cost of living = Leftover to invest or save

This is a very simple calculation that should give you a ratio of salary vs cost of living. You can apply it to any location you might be considering. Let's run through an example.

Let's pretend that I have two competing job offers. One at $100,000 in New York City and $75,000 in Indianapolis. The first thing I would figure is use a paycheck calculator to figure out what my bi weekly pay is before any costs:

New York = $2,788 * 2 = $5,576 per month

Indianapolis = $2,282 * 2 = $4,564 per month

Roughly you will be taking home $1,000 more per month in New York after taxes. Now lets factor in monthly costs:

New York = $5,576 - ($1750 rent - $500 groceries - $200 transportation) = $3,226 per month left over

Indianapolis = $4564 - ($800 rent - $300 groceries - 100 transportation) = $3,362 per month left over

Our example shows that Indianapolis might be the better spot financially, even with a lower salary just because cost of living. This quick calculation is even before factoring any sort of entertainment or other purchases, which are also likely more expensive in New York City.

How to arbitrage HCOL to LCOL

If you are willing to move around or think creatively, there can be ways to arbitrage the higher salaries of a HCOL location. Arbitrage in this sense meaning that we can try to leverage a higher salary in a location to get us to some sort of financial milestone or goal faster.

Typical cost saving measures

This one is pretty self explanatory and can be applied to LCOL locations as well. At it's core do the typical cost saving measures to reduce what you spend per month:

  • Getting roommates
  • House hacking (link to house hacking)
  • Reducing eating out
  • Taking public transit

Your savings in HCOL locations can be enormous with just a bit of tweaking. The goal here would be to get your cost of living closer to a LCOL location if you were choosing somewhere like New York. It may not get quite there and you may have to sacrifice on creature comforts, but it can pay dividends later.

laptop remote work

Find a remote job from a HCOL employer

With companies increasingly going more remote, this option is becoming easier and easier. The idea here is to find employers that are in HCOL cities and pay high wages and finding a remote job with them. You may not be able to negotiate the exact salary as someone who is in the city itself, but often even with a 20% discount it can be a salary boost for those of us in LCOL locations. This ends up being a win win for both the employer and employee.

To start your search for a remote job I suggest looking up the companies you know pay well in your industry. See if they are hiring for any remote roles. If not, you might still be able to reach out and ask for remote flexibility if you are a strong candidate. I believe this will become increasingly common and is a great path to being able to save a bunch of cash.

Work in a HCOL location and retire to LCOL

This is a long term strategy and is particularly relevant for those wanting to FIRE. Because the salary numbers tend to be larger in HCOL places, you can move somewhere solely for the financial aspects, amass as much money as possible, then when you want to retire or settle down just move somewhere with a low cost of living.

This strategy requires a minimum of 2 years to be worth it. 2 Years it the minimum amount of time it takes to get a enough cash together where it would be feasible to move and move back where the finances makes sense. One obvious caveat is if a job is so high paying it completely offsets all costs associated with moving.

The cool thing about this strategy is often when you move back to a LCOL spot, your quality of life goes up. That down payment you were saving on the west coast goes a lot farther in the Midwest. Likewise, you won't need as much to hit your FI number if this is part of your plan.