Good Money Blog

My old college roommate asked me several times recently if I’d be interested in moving from the Midwest to New York City. Speaking of relocation, I understand that everyone has different situations - job, family ties, and lifestyle. If I move to an area with higher living costs, I could very likely end up with a lower standard of living - even if I’m making more money. On the other hand, a lower cost location can help me live rich - even if I am not. So, how can I possibly look at it from a financial standpoint?

There’re many cost-of-living calculators online but they all use different formulas and general figures that may or may not match one’s specific situation or special needs: Sperling’s Bestplaces, CNNMoney, Bankrate.com, Salary.com, PayScale

To obtain a personalized estimate for the cost of relocation, let’s look at the following key factors:

• Income
  • Salaries - Expected salary and benefits
  • Investments - Business and landlord opportunities
• Expenses
  • Housing - Cost of housing including monthly mortgage/rent and condo fees
  • Bills - Utility bills such as water, gas, electric, and trash collection
  • Taxes - State/local income taxes and property taxes
  • Insurance - Homeowners and auto insurance
  • Transportation - Gasoline prices and parking, bus/subway/train fares
  • Food - Groceries and restaurant meals
  • Entertainment - Shopping, nightlife, attractions, parks, museums, and sports
  • Vacations - Cost of road trips and weekend getaways
• Net Cost
  • Change of income - Change of net expenses

If the net cost comes out negative, the move may not be a financially smart decision. You should expect to save less money or to accept a lower standard of living.

Example

As an exercise, I am going to estimate how much my new life in New York City can cost me:

• Income: +$17,600
  • Salaries: +$20,000
    • Type in my job title and obtain an average from the leading salary calculators: Salary.com, Indeed, Simply Hired
  • Investments: -$2,400
    • Loss of interest (4%) for the down payment on the new house (see housing)
• Expenses: +$28,200
  • Housing: +$20,000
    • According to REALTOR.com, a similar house in an average neighborhood of Queens/Brooklyn will cost 2.5x or $500K, so the mortgage payment will mushroom.
  • Bills: +$1,200
    • A very lowball estimate…
  • Taxes: +$8,000
    • As shown in State Income Taxes, NY state income tax is 6.85% and NYC income tax is 3.65%.
  • Insurance: N/A
    • A higher homeowners insurance is offset by the auto insurance I won’t need (see transportation). Get comparative insurance quotes at Netquote.com.
  • Transportation: -$2,000
    • Instead of owning a car (therefore no gas), I’ll get around with a 30-day unlimited ride metrocard for $81 every month.
  • Food: +$1,000
    • Expect higher grocery and restaurant bills even if I won’t be tempted to dine out more often…
  • Entertainment: N/A
    • Again, assuming I won’t shop more and will take advantage of free entertainment.
  • Vacations: N/A
    • Even if I don’t travel more, there will be more interesting destinations in nearby cities that I can choose from.
• Net Cost: -$10,600

As I mentioned, everyone has different situations, so the net cost can also come out very different. For some, relocation can be a totally emotional decision, so the numbers may not matter. For instance, they move for reasons like: getting a lifestyle that they dream of, living closer to family, relatives, or friends, or looking for better career opportunities.

Salary Value Index

To uncover the top (and bottom) US cities for building personal net worth, Salary.com recently ranked 69 US cities with population over 250,000 with the Salary Value Index (SVI). The index measured local salaries, cost of living, unemployment relative to the national average, diversity of industry, education level of the cities’ population, proximity to post secondary institutions, percent of population below poverty level, and median travel time to work:

Top 5 Cities Rank City 1 Plano, TX 2 Aurora, CO 3 Omaha, NE 4 Minneapolis, MN 5 Albuquerque, NM

Bottom 5 Cities Rank City 1 New York City 2 Washington, DC 3 Los Angeles, CA 4 Honolulu, HI 5 San Francisco, CA

Reference: 2008 Salary Value Index - Salary.com

Each city at the top of the list is fast growing and offers the largest difference between pay and costs. On the other hand, the cities at the bottom of the list may have some of the highest average wages in the country but they also represent the places where living is the most expensive, and pay differentials are not proportionately inflated. So, when it comes time to stretching the money and accumulating a nest egg for retirement, it becomes difficult to do in these cities. That’s something to think about.