Moving to a cheaper city might not save you money
Moving to a lower cost of living location is a popularly advocated means to cut expenses and live below your means. But does moving to a cheaper area really save the kind of money most people would need to save to make such a dislocation worthwhile?
Maybe not.
People interested in personal finance advocate lots of different methods to either increase income or decrease expenses. There has been a plethora of stuff (too much) written about the ever-ellusive ‘alternative income streams’ to do the former. The latter garners an even greater amount of attention. Free Money Finance has written several times about the idea of moving to another city to cut expenses. My family just did it earlier this year. Now David at My Two Dollars is planning on moving to a much cheaper area this summer. But there’s excellent evidence from behavioral economics research that this isn’t the money-saving move people think it is.
One of the basic principles of the new field of behavioral economics is something called ‘anchoring.’ Basically, anchoring means once you’ve gotten used to the cost of something, you compare similar things to that cost.
Anchoring is relevant in this context because when people move to a lower cost of living area, they’re expectation of the cost of housing (among other things, I suppose) is anchored to their previous (more expensive) location. So it’s been shown that when people move to a place with cheaper housing, they keep sinking the same amount of money into where they live. A family moving from Dallas to Des Moines spends what they used to pay for their old house; they buy more house in Des Moines because they’re used to a certain mortgage payment.
Interestingly, it also works the other way. If they move from a cheaper area to an expensive one, people typically just squeeze themselves into a smaller house and keep roughly the same size mortgage payment.
So maybe the advice to move to a lower cost of living city isn’t as automatically beneficial as I thought. I can tell you, though, that in our case we did cut our payment by a third for a similar house when we moved. Of course, everyone thinks they’re the exception to the rule, don’t they?
May 9th, 2008 at 4:52 pm
I suppose they do. Perhaps we could look at it as—moving to a new city can save you money, but only if you’re intentional about it and know the psychology of what might often happen. Which makes this post quite useful, otherwise people might not have even thought of it.
May 10th, 2008 at 3:04 pm
Having grown up in “the hood” and then moving to paradise at the age of 19, I can confidently say all of the following:
1. We love where we live and it’s well worth the money.
2. I probably earn a lot more money by living here.
3. Commuting to here would almost be as expensive.
4. It was incredibly expensive and difficult to buy a house.
5. The house is now worth a lot of money and won’t crash.
6. Our happiness is way more important than financial factors.
Live where you love and love where you live.
Bret - from sunny San Clemente, CA
May 10th, 2008 at 3:58 pm
I wrote several posts about my move from San Francisco to Houston (sugarland, tx). It all depends on your mentality, your current situation and the location. In my case the price of housing in SF is dramatically higher than Texas so I’m able to move from my 400k 650sqft 1 bedroom condo to a 3200sqft 4 bedroom home for half the cost. I’m leaving CA at the end of the month.
But I know what you’re saying, I experienced it myself during my home search. It was hard to fight the urges to splurge on a 300k house with a pool and a lake behind you. But my girlfriend and I remember what we’re trying to do, and thats building wealth for the future. Funny thing is we can get away with a smaller house for 150k, so I still feel kinda bad buying more space than we need…although we’ll have family over all the time.
May 11th, 2008 at 12:45 pm
Interesting post I never thought about this till recently. A friend of mine moved a few months ago to a lower cost of living area and when I talked to him if it helped him save money he said no. He had gone with the plan that he would be able to save more up but said that his finances were in the same state as they were before the move.
It is odd that this happens but the “anchoring” concept does make sense. It kind of goes along with the idea of people being creatures of habit. We get used to costs and get used to living a certain way. Theres a good chance we will shift that thinking with out evening knowing it when we move to a lower lost of living location.
May 11th, 2008 at 1:03 pm
I’m excited that I’ve lived in the same house for 16 years, it’s paid off, and I have no aspirations to move ever.
I’ve found that staying put is a really much cheaper over the long run. Compared to people moving every 3-5 years trying to get that better house.
May 12th, 2008 at 6:28 am
@ Mrs. Micah - I think you’re exactly right. Being conscious about it can allow you to avoid the trap of anchoring.
@ Danny - Good luck with the new place!
@ Bret - You’re correct, of course. But I think most people can find a place they like in a variety of places - some with a higher cost of living than others.
May 26th, 2008 at 11:40 am
Interesting topic. I suppose it comes down to the fact that people have become accustomed to a certain lifestyle and as result find it hard to break that pattern of spending even if they do move to another low cost area. From my own personal experience when I moved to a lower cost area the money I was saving on rent just seemed to disappear on non essentials.