Make no mistake, we are living in a work-from-home revolution. As global events have unfolded, those fortunate enough to have been able to earn a living from home have seen what is possible. And it’s exciting.
We’ve seen that most of our work can be effectively performed from the comfort of our homes – or from anywhere for that matter. And we’ve seen that open-plan offices aren’t anywhere near as effective as mainstream thought may have led most of us to believe.
This brings an important question into clearer focus. If we can earn the same amount from anywhere, then should we be looking to cut our living costs by changing our location?
What Is Geographic Arbitrage?
This question centres on an idea that has floated around the financial independence movement for some time now. It’s known as geographic arbitrage (or “geoarbitrage”).
Put simply, geographic arbitrage aims to take advantage of price differences between different locations. This is usually achieved through earning money as per a higher paying location but incurring living costs as per a cheaper location.
In practice, this might be domestic or international:
- Domestic geographic arbitrage aims to take advantage of lower living costs and/or higher earnings within the same country. Distance from major cities is likely to drive down housing costs, for example, but significant gains can also be made through something as simple as moving to the other side of a town.
- International geographic arbitrage aims to take advantage of lower living costs and/or higher earnings abroad. As I’ll show shortly, gains from geographic arbitrage have the potential to be more significant when we head down this road, but it’s not a strategy for the faint-hearted.
Running Some Numbers
Let’s illustrate this idea with a very simple example.
Joe Bloggs is based in South East England and earns a net salary of £40,000 per year. Let’s assume he can continue to earn that same net amount in whatever country he chooses by working remotely. He is therefore exploring options for how he can reduce his living expenses via geographic arbitrage.
First, he needs to get an idea of the living costs in each country. The good news is that the internet offers ample options for high-level comparison by country (The Earth Awaits and Expatisan are two particularly useful resources).
Joe investigates three options: a move to the North of England, a move to Malaga in Spain, and a move further away to Bangkok in Thailand.
As you can see in the below table, each move offers an opportunity for geographic arbitrage. Joe’s living expenses could reduce by as much as 35% on average if he made the bold move to Bangkok. That would mean an arbitrage gain of £8,400 per year, which if invested for 10 years at a return of 6% per year, would equate to an extra £15,000 of investment.
You can quickly see how geographic arbitrage can shift the goalposts for financial independence. This is just the effect of one year of additional investment. If Joe piled an extra £6,000-£8,000 each year into investments, this would quickly compound into a small fortune.
Geographic Arbitrage and Financial Independence
The acceleration towards financial independence can therefore be twofold:
- Geographic arbitrage can increase our savings rate. As we’ve seen here, moving location can get us to our original FI target quicker.
- Geographic arbitrage can reduce our final FI target. Assuming we decide to stay in the new country for the future, our day-to-day financial requirements are reduced due to the lower cost of living.
What’s more, this example is limited to popular cities. There are bigger savings to be had as you head further afield from the city life.
Of course, this is a highly simplified view of earnings and living costs, particularly for the two cases of international geographic arbitrage. In reality, Joe Bloggs may face different taxation treatments and will certainly confront some currency fluctuations over the investment time horizon.
But it nonetheless illustrates the salient point. Geographic arbitrage can be a highly effective tool for accelerating financial independence, and all the while has the potential to transform lifestyles for better.
The Indirect Benefits of Geographic Arbitrage
Let’s take stock for a moment of some of the potential benefits of geographic arbitrage.
#1: Financial. As we’ve already seen, moving location can increase our savings rate, reduce our FI requirements, and accelerate our path to financial independence.
#2: Lifestyle. But it also offers a remarkable opportunity to redefine our lifestyle. Our new country might offer us a more satisfying year-round climate. Our new country might also give us access to improved healthcare and education. It might be safer and more peaceful. Bottom line: it’s possible to get both a financial and a lifestyle gain from geographic arbitrage.
#3: Experience. It’s also an opportunity to put experience before possessions. Moving to a new country is a chance to lose the unnecessary clutter and recalibrate your focus towards experience. The evidence tells us that experiences making us considerably happier than possessions over the long run.
#4: Education. And of course, immersion in a new culture is the ultimate learning experience. New languages, customs, foods, history, architecture and interactions. The novel experience of a new country will work your brain like never before.
The Downside of Geographic Arbitrage
This all sounds rather easy and extremely enticing when summarised in a thousand words. But obviously there are downsides.
Feasibility and profitability will vary by circumstances. It’s much more logistically challenging, for example, to move a family than a couple.
And despite technologies breaking down the barriers of distance, physical distance from family and friends can be too much for some.
Aside from ensuring your financial projections are robust, that’s why broader research is so important. To take the plunge, we must have an intimate understanding of what we are getting ourselves into.
Anyone considering a move further away might be wise to test the water first, spending enough time immersed in the country to fully understand the implications before committing.
What Does the Future Hold?
As we reflect on a period that has exposed the risks of our geographic interconnectivity, I am paradoxically even more excited about the idea of geographic arbitrage. And I suspect I’m not alone.
I expect many will embrace domestic geographic arbitrage like never before. The new nature of work-from-home jobs will encourage large numbers into cheaper, more peaceful zones outside cities, leaving office life as an occasional commute when required.
Economics tells us that if enough people do this, we will inevitably see a reduction in the financial advantages. But after a health crisis, I suspect that people will be willing to make that compromise.
Meanwhile, there may be higher barriers to international geographic arbitrage for a while. But those barriers will come down and I suspect the move abroad will become a more widespread dilemma.
Either way, geographic arbitrage is worth some thought. It could be the key to achieving financial independence years earlier than you had originally thought possible.
