Location arbitrage and the cost of living

Lately, I've been thinking more about where we choose to live and how that affects our cost of living. Applying the 80/20 principle, I think it's fair to say that 80% or more of our recurring costs fall into just three categories: housing; transportation; and food.

We'll assume that our frugal selves choose to eat at home regularly, so the cost of food won't vary significantly based on where we live . Let's focus on the other two items.

First, housing. Let's assume that we are digital nomads who can work anywhere in the world, with the only requirement being that we want to live in a place where either English or Chinese is an official language. I've listed some common destinations below. The format is city - language - urban population - monthly rent of a 1-bedroom apartment in the city centre, in Canadian dollars (source: Numbeo).

New York City - English - 19.4 million - $5,069.69
San Francisco - English - 3.2 million - $4,378.02
Singapore - English - 5.6 million - $4,064.09
London - English - 9.8 million - $3,319.67
Hong Kong - English/Chinese - 7.3 million - $2,963.53
Sydney - English - 5.2 million - $2,699.77
Vancouver - English - 2.6 million - $2,451.00
Toronto - English - 6.2 million - $2,388.76
Auckland - English - 1.4 million - $1,846.40
Shanghai - Chinese - 41.3 million - $1,517.89
Birmingham - English - 2.9 million - $1,332.39
Shenzhen - Chinese - 23.3 million - $1,026.51
Taipei - Chinese - 9.1 million - $897.14
Chengdu - Chinese - 15.4 million - $581.52

Some insights I had:

1. There is a huge range in housing costs even among well-developed cities with similar populations.
2. Housing is significantly more expensive in English-speaking cities.
3. North America is more expensive than (English-speaking) Asia, which is (surprisingly) more expensive than the UK and Australia.
4. Purely Chinese-speaking major cities can be very inexpensive.

Second, transportation. The main question here is – do we need a car? If we do, then the cost of an average car, insurance, gas, and maintenance will be about $1,000 per month.

Meanwhile, one-time public transportation tickets range from under $1 (in Shanghai) to over $4 (in London). If we assume an average of two trips per day, we're looking at monthly public transportation costs from $50 to $250. If we live in a city with very good subway infrastructure, this translates to significant savings.

Now, let's do some scenario analysis.

Scenario 1: living it up in NYC, with a regular office job and takeout lunches during weekdays.

Monthly rent: $5,000
Monthly extra eating out costs: ~$600
Monthly transportation (subway): $172

We're looking at $70,000/year before accounting for groceries, recurring bills (utilities, Internet, cell phone, streaming services), clothes, gifts, household items, etc.

Scenario 2: responsibly trying to scrape by in Vancouver, where a car is necessary.

Monthly rent: $2,451
Monthly transportation (normal car): ~$1,000

That works out to be over $40,000/year for rent and transportation.

Scenario 3: maximizing "location arbitrage" as a Chinese-speaking digital nomad in Taipei.

Monthly rent: $897.14
Monthly transportation (subway): $56.43

Which works out to be roughly $11,500/year for rent and transportation.

I was definitely surprised to find that New York City is over five times more expensive than Taipei. They're both democratic environments and densely populated urban metropolises with excellent public transportation. Is the English-speaking factor and cultural advantages of New York really worth this immense cost of living differential? Who is better off – a management consultant with an after-tax income of $100,000/year in New York City, or a digital nomad with an after-tax income of $50,000/year in Taipei?

If we go further down the location arbitrage rabbit hole, we can find even more extreme examples. A similar rent/transportation calculation for Chengdu yields $7,500/year. Or if we forego the English/Chinese language requirement, how about Chiang Mai at $6,400/year?

Of course, there are other considerations – for example, we might be concerned about visa issues, safety, or the quality of our children's education. We may want our children to grow up in an English-speaking environment, as it is after all the lingua franca of our world. Cultural advantages may in fact matter a lot. And if our income is substantially higher than the costs associated with where we choose to live, then perhaps it shouldn't warrant much consideration.

Still, I think for the majority of us who have not yet achieved financial independence, where we choose to live is objectively a very important factor in determining how much money we can save and how much we can spend on things that actually allow us to live a better life. These, in turn, determine how much money we need to achieve our financial goals, which to some degree determines what careers we can choose and how much time we devote to generating income.