After writing my previous post about hidden costs of living in a high cost of living area, I thought of a few more. They were so hidden that it never even dawned on me that these costs exist. Actually, I think I knew they were there but since I’ve always lived in a high cost area, I just thought that it was normal. However, after reading personal finance blogs of those who live in lower cost areas, I’ve realized that there are some more increased costs that those living in a high cost of living area face.
Emergency Fund
Personal Capital, which is an online wealth management tool I use to keep track of my financial accounts, sent me an e-mail last weekend that my cash flow was high and I should consider moving some into my investment accounts where it can grow. The standard advice from most financial advisors is to keep six months of expenses in an “emergency fund” just in case you have, you know, an emergency. They also advise you to keep this money in a liquid account so that you can access it easily, such as a “high yield” savings account. When you live in a high cost of living area, you naturally have higher expenses and if you followed the rule of thumb, you’d have to keep a large amount of money in an emergency fund which earns you a pittance, and actually loses money over time due to inflation.
To combat this, you can instead put some of that money to work for you. Having funds that you’ve labeled “for emergencies” sitting in your bank account is not absolutely necessary. I don’t view my money in buckets, i.e: emergency fund, vacation fund, etc. In a true emergency, my entire portfolio is an emergency fund. Plus, I can always use my credit card in an emergency which would give me some time to access my less liquid accounts. A Roth IRA can act as an emergency fund, but make sure you know the rules about withdrawing money from it. However, this might not be the right choice for everybody. My family is a dual income family where both my wife and I have stable jobs, so I feel more comfortable with a smaller emergency fund. I would feel differently if I was working as a freelancer or in a volatile industry.
Down payment for a house
This is the same concept as the above. When you live in a high cost of living area, housing is usually the one expense which costs a lot more compared to lower cost of living areas. Similar to emergency funds, the personal finance experts tell you to put the money you’re saving for a down payment in something safe since you will likely need the money in a few years. Short-term investments rarely include stocks so once again, you’re putting savings for a down payment in CDs, high-yield savings accounts and maybe bonds. Those investment vehicles have lower returns than stocks but are safer and less volatile. This is something I’ve struggled with in the past and still struggle with now. Where should I put the money I want to save for a down payment?
A year after my wife and I got married, we started hunting for a co-op since buying a house is practically impossible for a young couple here in NYC, unless you make an extremely high income or have very generous and rich parents. My wife and I threw our paychecks into a savings account but after looking at a few places decided that we were better off renting for the time being. However, in the back of our minds, we always thought we would buy a place at some point in the near future. We just didn’t know when. So there was a chunk of money earning very little interest sitting in our bank accounts. What hurts even more was that during this time, a bull market took off in the stock market so if we had invested the money instead, we would have earned a much higher return compared to the “high yield” 1% savings account. These are the opportunity costs of having to have so much more money in accounts that generate little if any return.
Temptation
I pride myself on having the strong will power to avoid keeping up with the Joneses, but maybe I have it easy. I don’t work in Manhattan. I work in government. Many of my co-workers bring their own lunches. When you work with co-workers or hang out with friends who go out to eat everyday, happy hour after work, and have name-brand handbags, cars, clothing, etc, it must be a lot harder to avoid the temptation to purchase those items as well. Even if you could resist spending wasting your hard earned money on status symbols , it is hard to always turn down invitations to go out. Plus, you don’t want to be seen as an outcast and they might at times be good networking opportunities to go out with your colleagues outside of work. I’m sure that temptation exists in lower cost of living areas as well and people living there also struggle with trying to keep up with the Joneses. But, with the amount of money that many people have in the high cost of living areas like NYC, LA, Silicon Valley, etc, it is even harder to avoid the temptation to keep up appearances.
If you live in a high cost of living area, do you have to keep a large amount of money in cash investments? How do you save/invest your emergency fund and house down payment fund? Do you think it’s harder to avoid temptation when you live in big cities?
I’d like to thank Kristin Wong for covering my first post about the hidden costs of living in a high cost of living area on Life Hacker Two Cents
This hits super close to home! I’m considering moving to a cheaper city so that I can tackle some of my financial goals that are (almost) impossible where I currently live (NYC). People think of rent as the big money-sucker around here, but in truth, pretty much everything is more expensive—farmer’s market prices are high, alcohol and eating out are higher, public transport costs more. Even Chipotle burrito bowls are marked up (by 30%—insane!). Salaries for many careers are higher in NYC than in other places, but there are plenty of places with much lower cost of living and only slightly lower salary.
Huh, I didn’t even know Chipotle burrito bowls were marked up by that much! Yea, a lot of things are more expensive by housing is by far the largest expense that is higher. And you’re right about the salaries. Unless you’re working on Wall Street, or a big law firm, or tech in Silicon Valley, the other jobs may have somewhat higher salaries but you can find decent salaries with a much lower cost of living in other areas.
Of course, it’s harder because the life in a high cost of living would entice you and peer pressure is really hard to deal with it. I have tried living in a high cost and it’s different. It’s easy to say, but definitely it’s hard to do.
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Yes…easier said than done!
I think it’s great that most of your co-workers brown bag it. Rick brings his lunch to work a lot, but it’s hard sometimes because the guys are always going out. Luckily, we live in a average cost of living area, so he can grab lunch for 5 bucks or so. Great info here as always, Andrew!
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Thanks Laurie! Brown bagging it saves a lot of money but I admit it would be a lot harder if my co-workers didn’t also do that. It would be hard to say no to going out all the time.
I like the third one, that is, temptation. I work near the DC area and so the cost of living is really high. Even when it’s high, my co-workers always find the time and money to spend on just about anything (i.e. lunch, dress, night-outs, etc). I am amazed as to how they are able to fund all of these because our salaries are not really a salary of an executive.
I’m really good at saying no. My co-workers know that I am a very frugal person and I take no offense on that. I always go with them but they know that I won’t buy anything. I can go with them but they know that I won’t eat because I have my leftover for lunch. They know that I won’t drink in the bar after work just because I don’t drink at all, etc.
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Wow, that’s pretty good that you have so much will power. Plus, it’s great that your co-workers are very understanding. Maybe it’s a stereotype but I think in certain fields (I’m thinking finance or blue collar fields), the co-workers would ostracize you. Yea, I know it sounds like college but even adults can often act like kids!
This is all really good stuff. I am always shocked at housing prices in some of the higher cost-of-living areas. It seems nearly impossible to buy unless you are bringing in (what seems to me, at least) a huge salary.
DC @ Young Adult Money recently posted…5 Statistics That Show How Big of a Problem Debt is Today
Yes, housing prices are pretty shocking!
I started eating out a lot less when my daughter was born. It wasn’t to save money, though that is a nice benefit from it. It was simply because kids are so difficult to take out to eat!
Yes, very true. If we do go out, we go to a family friendly place.
living in NYC can be a drag on your finances…
cooking for myself and fiancee has been great on our budget…we love to cook, so that makes it easier…
using public transportation instead of driving saves gas money…
we have also reduced the number of movies we see in the theater…
Yea, I have a love/hate relationship with NYC. Love the city but hate how expensive it is. Great that you guys cook. I honestly had no idea how to cook before I got married…but it’s not as hard as I thought and I actually kinda enjoy cooking sometimes now. Before we had our child, we went to the movies but not that often and mainly to see movies that would be worth seeing on the big screen. Otherwise, it can wait until it comes out on Netflix.
What relates to me is being surrounded by temptation. I guess I’m simply a weak human being and I tend to purchase items and go to places impulsively. Lol. Thanks for the great share. Nice to see that last point there. 🙂
I think sometimes it’s natural to get tempted and to shop impulsively. That’s why it’s often easier when it’s out of sight and out of mind.
The downpayment on a house is the big one. Even with both people in the relationship working and saving it can take years to save a realistic deposit. I personally think many people in the younger generations need to lower their expectations about what their first house is going to be like. I’m saying this as a young person myself who saved deposits for 3 investment properties.
None of the properties were “flash”, but I was able to get my foot in the market with them.
And if you want a “flash” house in the short term, just rent. Save all your money for investment properties.
Yea, good point. I see nothing wrong with renting and putting money towards investment properties. Sometimes that makes more sense financially when you live in such an expensive area.