When it comes to reaching financial independence, leaving an expensive city for a low cost of living area is pretty much a pre-requisite.
At least that’s the impression you are bound to get if you spend any amount of time reading financial independence blogs or listening to FI podcasts.
Minimize your living (and other) expenses, build up a solid nest egg and live happily ever after, right?
Perhaps, but not always.
As a matter of fact, moving to an expensive city can be a tremendously powerful way to set you on the path to financial independence.
It is especially true if you are young, educated and don’t (yet) have children.
Speaking from personal experience, I can certainly say that I wouldn’t be nearly as far on the path to FI had I not moved to London close to a decade ago.
I also have quite a few acquaintances who managed to build up impressive nest eggs by moving to big cities with a high cost of living.
Here’s how they have done it.
Easier Access To Highly Paid Jobs
Most big cities benefit from powerful network effects. There is a reason why New York, London and Hong Kong house most of the world’s investment bankers, consultants and lawyers.
Alternatively, if you are a software engineer then San Francisco, London (and lately Toronto) are all good places to be.
And if you are pursuing a career in the oil & gas industry, you may want to consider Houston and Calgary.
Put simply, your chances of landing a well-paying job with a bank, consulting firm or a large corporation are far better in a large city with a plentiful supply of such roles.
You will also likely qualify for a cost of living adjustment by virtue of living in an expensive city. Employers typically calibrate salaries depending on location or implement a cost of living adjustment which is added to your base salary.
Finally, you will also find that climbing the career ladder is easier in a large city. Employee turnover tends to be higher, which creates opportunities for advancement across the board.
In smaller cities, employees tend to stay in their roles for much longer. This means you may end up waiting years for the next promotion – simply because your boss is in no rush to move along.
Better Side Hustle Opportunities
A side hustle is a fantastic opportunity to build serious wealth over the long term.
After all, if you were able to contribute an extra £100/month into a tax-efficient investment vehicle, you would end up with almost £600k after thirty years.
Between food delivery, scooter charging, babysitting, AirBnB, dog walking and hundreds of possible Task Rabbit gigs, big cities represent boundless opportunities for side hustles.
If you are young, energetic and serious about making money, you can easily make a few hundred pounds of extra income every month.
Don’t think that makes a difference? Then check out the chart below.
Reflect on the numbers for a minute.
If you start making (and investing) an extra £200/month at the age of 22, you can achieve the same result in nine years that would take you twenty-seven years to accomplish if you start at 30.
And trust me – your twenties is the perfect decade for side hustling as you still have lots of energy and few commitments.
An Expensive City ≠ High Cost Of Living
When I was considering moving to London a lot of people tried to put me off by telling me how exorbitant the cost of living is.
To an extent, they were right. Cities like London and New York aren’t cheap.
But guess what? You don’t have to live in a swanky Zone 1 apartment – Zone 3 or 4 will do just as well.
And for people in their twenties who are focused on their full-time jobs, their side hustles and taking advantage of all a big city has to offer, living on their own isn’t necessary.
When it comes to entertainment, there’s an endless supply of free or very low-cost options.
Museums, exhibitions, parks, rooftop terraces, free gardens, picturesque walks, art galleries, free comedy nights, free live music… the list just keeps going on and on.
Anyone who says having a good time in a big city is expensive hasn’t tried hard enough.
Buying A Property Sets You Up For Life
Despite all the hand-wringing that is going on, the reality is that if you have a decent job, a side hustle, a good savings rate and a partner with the same attributes, you should be able to save up for a down payment on a property in a few years.
It probably won’t be glamorous or centrally located – and that’s okay.
Owning a piece of real estate in a big city sets you up with a passive income stream for life. When you end up moving away, you simply rent it out and let someone else build your equity for you.
Over Time, The Economics Of Living In An Expensive City Stop Adding Up
As you get older, settle down and start a family, you will notice two expense items taking up an ever-increasing share of your budget.
The first one is rent. After all, it’s no longer realistic to be sharing an apartment with friends once you’ve got little ones running around.
It’s equally tough to live in a tiny one-bedroom apartment if you have children. Just ask anyone whose children have gone through a sleep regression.
Therefore, your housing expenses are bound to increase substantially.
The second one is the cost of childcare. Having someone looking after your children is a pre-requisite if you are trying to hold down a gig in Big Law or Big 3 management consulting.
Inevitably, your cost of childcare will be much higher in a big city – simply because your nanny will have a higher cost base of her own.
You Need To Know When To Pull The Plug
If you aren’t careful, you could well end up like my friends who are poor on £250k/year. That is an outcome I wouldn’t wish upon any of my readers.
Housing and childcare are the two leading reasons why the economics of living in a big city rarely add up once you have a family.
It doesn’t end there, of course. Here’s an excellent post comparing high vs low cost of living locations across a number of different dimensions.
Sure, things may well work out if you happen to earn more than £350k in a place like London.
Unfortunately, as we know from the UK income distribution data, only a minority of people ever get to make that much money.
If you happen to be in this category – congrats! You get to enjoy the big city lights a while longer (if you still care for them).
For everyone else – it’s been great while it lasted.
Pat yourself on the back for building up a serious nest egg while you were there. It is now time to pack your bags, move away – and reap the rewards in a more relaxing environment.
About Banker On Fire
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Banker On FIRE is a London-based M&A (mergers and acquisitions) investment banker. I am passionate about capital markets, behavioural economics, financial independence, and living the best life possible.
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