What Is Geographic Arbitrage—and How Can You Pull it Off?

"Geographic arbitrage" is growing in popularity. Simply put, it means saving big by earning income in a strong economy—while living (and spending) somewhere low-cost. Here's how to do it.

The normalization of remote work means more salaried employees than ever before are fleeing the cold for warmer shores, leaving small apartments in favor of houses with a yard, and absconding from tourist hubs towards more affordable satellite cities. This strategy also has the added financial benefit of lowering your cost of living—without taking a hit income-wise. Wealth builders call it "geographic arbitrage," which simply means growing your savings by earning income in a strong economy, while living—and thus spending—in a less aggressive market.

Although the math behind this principle is relatively straightforward, it can be hard to put into practice. There is no one-size-fits all approach to geographic arbitrage—but there are five key pillars to plotting a big move and pulling it off successfully.

01 of 05

Mind the gap.

For geographic arbitrage to work, you must have a good sense of where your money is currently going—and where you have wiggle room to save. Moving to a new city won't suddenly give you better money-management habits. Instead, instill discipline before you go. Create a zero-based budget and stick to it for three to six months so you can establish a baseline and get into the habit of tracking spending. Then, tighten the belt at home before you even think about a move.

After all, packing up for a new place has its own inconveniences and financial outlays. The only way to know if a move will be worthwhile is to grow the gap between your recurring expenses and your income. When you can't get any more frugal or there are no new ways to stretch a dollar, then follow your budget to your next destination.

02 of 05

Stick to the plan.

Look back on your spending plan to see where the lion's share of your cash is going. If your salary is pre-destined for student loans and credit cards, moving to a new town or country won't make those bills go away. But a move can help eke out savings by lowering housing costs and utilities, as well as other line items you might not have initially considered.

Can you reduce the cost of transportation? Will childcare expenses drop? Does the job market command a higher salary? Are sales taxes lower? You see where this is going. Line item by line item, use sites such as Bestplaces.net, Numbeo.com, and Expatistan.com to compare your current expenses to projected prices elsewhere.

Sometimes the move can be as simple as going from San Francisco to Oakland or from Miami to Fort Lauderdale. Even small shifts can spell sizable savings. For those looking further afield, don't let the lure of an exotic adventure side-track your savings: Only pack your bags if the numbers shake out. And once you're settled in your new digs, don't spend all your loot trying new restaurants or splurging on fancy furniture. Stick to the plan and prioritize those original financial goals.

03 of 05

Use your imagination.

Geographic arbitrage works by leveraging financial opportunities in multiple places. For example, a clever couple in Maui might not want to sell their house and move to Mexico permanently. Instead, they might rent out their waterfront condo on Airbnb during the peak season. Doing so could cover a good portion of the mortgage for the year. That's an especially smart move if they can spend that season in places like Atlanta or Philadelphia, which offer VRBO stays for a much cheaper nightly rate. They'd hit their financial goals even faster if they moved abroad—to cities such as Chiang Mai in Thailand or Windhoek in Namibia, which boast $25/night apartments of a similar size.

Based on personal preferences and life goals, each person has to decide how long they'll stay and how far they'll go. Check sites like talesmag.com for inspiration and insights from people who have already done it. Stay creative about what might work for you and your family—and be open to unexpected possibilities. A little bit of imagination could go along way.

04 of 05

Ask the experts.

To make your next move your best move, solidify the gains you have already made. Ensure that your current income source is stable and that a change of location won't derail your career. If the plan is to keep your current job but to work remotely, confirm that your employer is fine with the shift. They may say that it's OK to work within a certain radius, but an international move might require more steps for approval. In some industries, employee hours and salary could change based on where you go. Other bosses might not care one iota. In short, don't assume; instead, ask HR and get all the facts in writing.

If this move will usher in a career change, apply for preferred roles and secure your spot before you move. Gone are the days when you have to interview face-to-face for everything. Now, it is normal to job-hunt from afar with the promise of a move farther down the road. Some employers will even pay for relocation. But do all your homework on employment prospects and put your name in the hat well before you pack your bags.

Lastly, freelancers: You already have a lot of location flexibility, but beware of tax implications that could undermine take-home profits. Ask a tax advisor what income and sales taxes might affect your bottom line. Consult with experts and be strategic about increasing your earnings and solidifying streams of income.

05 of 05

Stay connected.

Essentially, you want to hedge your bets. Buy where things are cheap and earn where you can rake in the dough. That means you'll need to stay connected with what's happening back home—in case you can find a bargain there that can be leveraged to your benefit. Simply put, you'll have to stay in touch.

If you move overseas, keep a United States phone number (GoogleVoice or Vonage are good options) just in case a high-paying remote work opportunity pops up after you've moved to Bali or Bangalore. Even if the transfer is just across state lines, you might want to hang on to your number with that old area code. It might send the right signal to hiring managers in your old neighborhood who might be looking for virtual workers with your credentials. Have a trusted person handle your mail, so you won't miss out on reimbursements, bills, and special offers that could affect your spending plan.

No matter which destination promises big savings, if your relocation is longer than a day trip away from the ones you love, build an annual visit home into your budget. You'd be surprised how many weddings, birthdays, and anniversaries pop up after your departure—but none of those events (or costs) should come as a surprise. Make travel home a predictable part of your relocation plan. Keep your bank account and your options open, but don't lose touch with the people and communities you leave behind.

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