Geo arbitrage, or geographical arbitrage if you want to be entirely correct, is a well-known method of increasing your ability to save money.
As such you will find the usual plethora of posts extolling its virtues, especially for those seeking early retirement or financial freedom.
However, I have zero intention of devoting a blog post to repeating what others have already said. What would be the point of that?
On this blog, as you poor readers know, I like to only write about things I’ve actually done, been, ate or drank. And at least hope I have something different to offer based on the experience.
Therefore today I’m going to ramble on about some unexpected benefits of using geo arbitrage on our own journey to financial freedom
These reasons weren’t why we did it at the time. But in hindsight (that ever wondrous thing…🤣) I can now see how these played their own part in making our journey successful.
So in the ever hopeful spirit of helping others – this is what I learned about how geo arbitrage can unexpectedly help you save money….
First Things First - What Is Geo Arbitrage?
At its simplest and most often quoted, geo arbitrage is simply living in a location with a lower living cost whilst earning an income based on somewhere with higher living costs.
The classic example being the stereo-typical expat retiree. Moving home once no longer tied to a location for work opens up a whole world of places where it is possible to get a better standard of living for the same income.
But you don’t have to wait until you are retired to take advantage of geo arbitrage. The reason why so many FIRE-seekers love it is because it’s the ultimate savings booster.
Living somewhere with a low cost of living whilst earning an income in a high cost area lets you save more big time. I’ve touched on this before in my own journey.
Working part-time in London and commuting home to Norfolk undoubtedly shaved years from our FIRE journey
Earning a London-based wage whilst living in Norfolk meant I was able to save much more each year. The bigger the gap between earnings and living costs, the faster those savings grew.
And that’s a handy way in to move on from repeating well-known advice onto the first of the unexpected benefits of geo arbitrage for us.
Maximising Your Earning Ability
BankerOnFire likes to hammer this point home regularly but it’s one I agree strongly with so worth repeating;
There’s a limit as to how much you can cut costs
There’s (theoretically) no limit on increasing your earnings
At some point, however good at being thrifty and delaying gratification you are, there’s a natural limit to what you can live on. Indeedably does a good job here outlining the issue for an average family in the UK.
The whole point about using geo arbitrage though is that it gives you a way of not being average
And that’s a good thing but let me explain….
The industry I fell into by accident, energy trading, didn’t exist locally after our employee went out of business early on in our journey. I had two choices – either retrain and start again or go where the work is. I choose the work.
At the start, the uplift in earnings from my previous job to the one I found in London barely seemed worth the painful commute. Yes, it paid a premium to local jobs but the extra hours on a train didn’t always feel worth it.
Roll forwards a few years and a couple of promotions and that balance shifted dramatically. Earnings are similar to investing in that way in that pay increases and bonuses really start to compound.
Opportunities opened up that would never have been available back in my home town. Working for a bigger global firm competing against financial trading houses and London living costs really started to pay off.
By the time I quit I was earning well over what the average CEO earnt back in Norfolk
And that was on a part-time basis in a by far junior role
Do I personally think it’s fair these kind of roles pay so much more than other jobs? Not really. I never felt like I contributed much to society – the focus was purely creating more wealth for the company.
Am I sure I would never have been able to earn that much staying in Norfolk? Absolutely. And yes, I could have moved to London and saved myself that tortuous commute. But that wouldn’t have let me use geo arb to my advantage and save so much.
However – that’s not the only way geo arbitrage helped me on my path to early retirement. So let’s get on to the next of those lesser known reasons I promised….
A Different Perspective On 'Normal'
This one is something it took me a while to realise. It’s also not something I’ve seen much written about so hopefully a bit more interesting to read about here.
Working in London, especially in the financial sector, is a very different world. I always thought it felt a bit of a bubble.
Not in the work itself so much, though that’s true too. But in being surrounded by many people who are money rich, time poor. It tends to lead towards different choices and views on what life ‘should’ have or be like.
Not everyone of course. But talk of things like private schools, exotic luxury holidays, crazily priced houses, expensive cars and the like were pretty commonplace.
So much so that it often felt like being in a “Super Jones” bubble world
Now as you know neither S or I are especially interested in or impressed by shiny baubles. But it was very easy to see how people got swept up in it all. Setting new expectations of what ‘normal’ should be.
By working in London but living out in the country, I was often struck by the differences in expectations, of hopes.
Again, not everybody, obviously. But by and by, people’s expectations seemed to pretty much match those around them. That whole “fitting in” or “keeping up” thing.
Having a foot in both camps meant I never really felt like I ‘belonged’ to either. The London guys just accepted I was weird for not spending as they did and my Norfolk gang would just accuse me of going ‘posh’ every now and then 🤣
When you aren’t surrounded by a single group of like-minded people, the peer pressure tends to disappear. After all, which group are you trying to fit in with??
That’s a pretty big benefit of geo arbitrage for people who don’t find it easy to be different.
But wait, there’s more…..
A Natural Upper Limit
It’s not just expectations that changed with the miles but also the opportunities.
Entertaining yourself in London tends, by and large, to involve spending money. Shows, events, gigs…..the whole point of living in London is to enjoy what it offers. And not much of that comes for free.
My London ‘bubble’ may have been an extreme example for sure but people expected to go out more, eat out more. Cash rich, time poor means happy to pay for things to be organised and done for you.
For example, it was pretty common for people to have a cleaner, a child minder etc. A small army to help them survive their busy lives. The cost/benefit entirely worth it from their perspective.
The other world? Definitely the exception, not the rule.
There’s just different expectations of how life is ‘done’. Of what normal looks like.
Take eating out as an example. Clearly cheap food can be found in London but the price range is naturally much wider with the fantastic choice available.
Whereas a ‘fancy’ meal out in a rural town has a natural upper limit, dictated by the lower average wage of the area. That and the far fewer michelin star restaurants!
Likewise with housing.
The London housing market has a plethora of options above the £1m mark.
Last time I looked on Rightmove, there were only 65 in the entire Norfolk county…
Whilst much has been written about the advantages of living in an area with lower living costs – that’s not the point I’m probably failing to make here now.
It’s just naturally harder to spend a lot of money when they are fewer opportunities to do so
Just look at the difference in the shops in the Canary Wharf Mall to those pretty much anyway else. I used to find it hilarious what was deemed reasonable there. I mean, a steak and oyster bar in Waitrose? Seriously?
So again, for those who find it hard not to spend, geo arbitrage offers a natural advantage in helping limit your options.
But I entirely understand the commute involved in adopting this strategy will not be for everyone. I was always mildly entertained (dismayed..) by those graphs of ‘average commutes lengths’ that came out from time to time. I’d usually be off the scale..
For me, it was a compromise worth it since I knew the goal. A limited time commitment. Especially once I cut down to part-time with only three days in the office, one at home.
It’s all a balance and for me the opportunity really paid off. But will it last?
Will The Geo Arbitrage Opportunity Last?
That compromise of commute length versus savings may no longer be necessary if the increase in remote work opportunities continues apace after the pandemic ‘polite shove’ along the path.
I’m probably in the middle of expectations when it comes to predicting the future here. Do I think office blocks will be abandoned forever. No.
But I do think most large companies are taking the opportunity to downscale on space needed. For sure. Flexible working, hot desks and the like will be here to stay.
It may be just enough to tempt more people out of the cities. Further lured by the open spaces that were so prized during lockdown.
It will take some time but I wouldn’t be surprised to see more people take advantage of working differently
Especially anyone on the FIRE path
It’s a less extreme version of the oft-discussed global nomad strategy. Living in Bali, earning in USD. Or GBP. Or EUR. You get the idea.
We’ve tried the part-time nomad thing and it actually works pretty well for us. But the downsides aren’t for everyone.
A FIRE strategy based on within-country geo arbitrage doesn’t have those same disadvantages
And from my experience certainly, a number of advantages above those usually extolled
Worth thinking about…
So over time – in the same way globalisation is working out – I’d expect the city/rural opportunity to slowly balance out more.
I’m glad we accidently fell into this strategy. Funny how those double redundancies ended up working out so well in the end. Often the way!
Using geo arb really did end up being a big part of being able to retire early. And it looks like we may accidently be at it again as we consider where we want to live now.
When you have (almost) total freedom on where to live – how do you choose?!? Still working on that one!
In the meantime though – I’d be curious to hear if it’s a strategy you’ve considered or have already used yourself? How has geo arbitrage helped you? Or not?!