People downsize for many reasons and in many ways. For those who are relocating, it can be hard to find the best low cost of living cities for your downsized life is very important. After all, one of the primary purposes of downsizing is to get your living expenses under control.
There are two primary ways to accomplish this. The first is to downsize your footprint. If you need to live in an expensive area, this is often the only option. If you can afford spacious digs in a city like New York or San Francisco, God Bless. You are obviously part of the 1%. It is getting so that few can afford even modest apartments in some of these major cities. Another way to downsize is to relocate to a less expensive town or city. For those who are running portable businesses, relocating to a less expensive area can be an important first step to financial freedom.
Finding the right place can very tricky. Sifting through the different possibilities can be a daunting task. Further, if you are thinking of moving to a fairly distant location, the list will have to be narrowed down to places you can actually visit.
What makes the best low cost-of-living cities such a bargain…
When you talk about cost-of-living issues, you aren’t just talking about the cost of buying or renting a home. That’s a big part of making a place affordable, but it is not the ONLY factor. People who evaluate affordability are generally talking about a basket of consumer prices that are related to the overall cost-of-living. The impact is cumulative. Combine all these factors and someone with an al algorithm will give you a general cost-of-living.
So this all should be very simple? Right? WRONG! Some items on the list might be very low, but others might be high. You have to take a look at your lifestyle and needs. what is a great cost-of-living for one person, might have some big-ticket items that will make it expensive for you. For example, just because purchasing a house is relatively inexpensive, it doesn’t necessarily mean that renting is a big bargain. It often is, but you just can’t be sure.
Health care can be one of those wild cards, particularly in the US. Many low cost-of-living areas have high health care costs. Such a location might be ideal if you are young, in great health and have a job that provides you with top-of-the-line health care. But if you are self-employed, not so young, with pre-existing conditions, the premiums and copays are a punch to the gut. You might even find out that you are better off in a more “expensive” location that has a more supportive health care system.
Cost of Living Factor 1: Housing…
Housing is almost everyone’s biggest out-of-pocket expense. In more expensive locations, housing has been known to vacuum up 30-50% of an individual’s income. We are, in fact, living through a slow-motion housing crisis. A process that I refer to as ultra-gentrification is walling off entire cities and counties to even those in the upper reaches of the middle class. In the New York area where I reside, the job opportunities available in New York City will soon be no longer available to anyone making under six-figures a year. This is simply because, given present trends, there will be no affordable housing within any reasonable commuting distance. The upward trend of housing costs in areas surrounding the big-apple has gone from a slow wave to a tsunami. This is not just a local issue, but a global one.
So, for most people, this is the single biggest factor determining affordability.
Know the rental rates in different parts of town and what amenities are associated with these neighborhoods. Make sure you understand all the “extra fees” that so many complexes impose. They add up fast. Have a pet? $100 more. Want parking? That will be $80/month. Extra storage? Just leave an arm and a leg for collateral.
In many areas of the country, it is significantly cheaper to buy than to rent. But you need to stay put for about 5 years for this to pay off. Be aware of the following expenses:
- Know the price points of the market you are in.
- Know the market. How fast it is appreciating and what the schools are like (this impacts future value and stability of prices during a market downturn.)
- Work with a lender and calculate the down payment and monthly mortgage payment (this will be approximate).
- Make sure you factor in property taxes.
- If you are purchasing a condo or are purchasing a home in a PUD (Planned Urban Development) don’t forget monthly maintenance fees.
You have to add all of these components up for a realistic view of outlay. The tax benefits of homeownership have changed in the United States, but you might want to contact your accountant. In some price-ranges and in some parts of the country, there is still a distinct tax advantage to owning a home. Your accountant would be able to tell you if there is any advantage either way in your particular situation. Also, DON’T go this alone. Find an agent you can trust and work with them.
Cost of living factor 2: Energy costs…
Don’t overlook this item. It is not often at the top of people’s cost-of-living list, but it should be. Remember that this includes heating and cooling. Depending on the prices, climate, and energy sources in your new home, the hit to your wallet can vary greatly.
The energy grid is a mess right now and some areas have incredibly high prices, while others remain relatively low. Regions of the country where the grid is “old” are particularly prone to service interruptions and ridiculously high prices. If you come from a lower-rate area and move to a place like New York where the grid is old, grab your wallet. It can be quite a shock. If you are renting, you may or may not be paying for your energy costs directly, but rest assured that this is reflected in your rent.
Oil? Gas? Coal? Solar? It matters…
Also, be aware that different areas use different forms of energy. For example, in the northeast, we still heat many of our homes with oil. That is generally more costly than natural gas. So be aware of that issue. In some regions, solar has taken off.
People who add solar panels often sell what they don’t use back to the grid. This can lower costs significantly. Whether utilities “cooperate” with green solutions such as solar energy depends on the climate and the age of the grid. So these are wild cards that have to be considered at the local level.
In New York, where the grid is old and cloud-cover pretty much leaves energy companies bullet-proof (they know people will be dependent on them no matter what) you can actually get a pretty good deal if you add solar. Adding solar to an old grid prevents them from having to do some significant upgrades, its a win-win for utilities and consumers. How well going green works in different parts of the country is highly levered to specific local conditions.
Climate and climate change…
If you are moving from a warm climate to a colder climate, remember that you will be using a lot more energy to keep warm in the winter. You might make up for that in the summer – or perhaps not. The summers are getting significantly hotter in many regions even if the winters remain chilly. New York just had a miserably steamy summer where running the AC almost constantly could not be avoided. This will be happening in an increasing number of regions. Areas that are already hot will get hotter. Areas that used to have comfortable summers are discovering air conditioning as a new necessity. Case in point, Quebec had a deadly heat wave this summer while Scandinavia had record heat resulting in wildfires. I wll be having more later about climate change and long-term plans.
Cost of living factor 3: The price of goods and services…
If you are thinking of retiring to a quiet island or starting your home-based business from a place like Hawaii, you need to think about the cost of goods and services. Newsweek called Hawaii the worst state to make a living in for seven years straight. Housing costs are high, but that’s true in a lot of places. What tipped the balance? It’s a place basic goods that we use every day costs a great deal more across the board. Hawaii has the dubious honor of being a place where toilet paper costs more than anywhere else in the entire world.
Why would this be the case? Because Hawaii, due to its location and size, has to import virtually everything it needs by either sea or plane, and that is very, very expensive. So everything costs more.
How much of a bite does this really take? Well, there are necessities that we purchase all the time that we take for granted. This is going to impact your daily and weekly outlay for – well – forever. Or, at least as long as you live in that location.
The trouble with this sort of expense is that it can be insidious. It’s not a big-ticket bill that you get at the end of a month. It’s more like those monthly payments for access to online services and programs like Photoshop, Netflix, The NYTimes or whatever. Individually, it’s not so much, but when you add it all up over the course of a year it packs a punch.
Cost of living factor 4: State and local taxes…
If you are moving within the United States, you know that state and local taxes (better know as SALT) are a big part of your cost-of-living. Finding the best low cost-of-living cities usually means looking at those state AND local taxes and factoring them into your yearly expenses.
State taxes are all over the map. From no taxes to flat taxes to progressive taxes, it can all get very confusing. The states that have the highest tax rates in the nation are
- New Jersey
- New York
It is no coincidence that the most expensive states in the nation are on this list. The taxes take a bite out of your wallet. But, these states also provide services that other states don’t.
On the flip side, there are nine states that do not have a state income tax. You can see the list below. One of the names on the list may be surprising. Washington is a very liberal state. So, it is an exception to the rule that liberal states always have high taxes.
- New Hampshire
- South Dakota
Some states have a flat tax. That is everyone pays the same percentage of their incomes no matter how little or how much you make. They are:
- Colorado: 4.63%
- Illinois: 4.95%
- Indiana: 3.23%
- Massachusetts: 5.1%
- Michigan: 4.25%
- North Carolina: 5.5%
- Pennsylvania: 3.07%
- Utah: 5.0%
The rest of the states have progressive taxation for more specifics on progressive taxation rates in the United States, use this link.
Most local taxes in the United States come in the form of property taxes. For the most part, that is the single biggest local tax a home buyer needs to consider. I covered that issue under housing. But there are exceptions. If, you think you are home free because your location of choice has either low or no state income tax, guess again. Local income taxes do exist. Unfortunately (but logically) they tend to exist in states where the state income taxes are unusually low. The revenue has to come from somewhere. In some states, the counties and cities take over when little is collected on the state level. Colorado, Kentucky, Michigan, Ohio, and Pensylvania seem to have an unusually large assortment of local taxes. For details on county and city taxes, go to this link.
Outside the US…
I certainly didn’t mean to leave those who are relocating in other countries in the lurch on some of these issues. Anyone relocating within their own country, or perhaps even thinking of expatriation, needs to think all these factors through carefully. If my readership grows outside the US, I will start addressing these issues. If you have specific questions, you can even leave a comment below, and I will try to help.
Cost of living factor 5: Healthcare…
This is an issue that is specific to the United States. For those living in other countries, count your blessings that this isn’t such a major constraint. This section is specifically for people in the US who will not have health insurance through their employer, are not on Medicare, and/or who may have a pre-existing condition.
Health care is the wild-card in the United States. I’m bringing this up because a lot of people do not recognize its significance in your decision-making process until it is too late.
Many people who are downsizing and relocating to cities with a lower cost of living are trying to start businesses. Perhaps you have been outsourced or downsized out of a full-time job where you were protected from the vagaries of trying to find health care without an employer. The election of Trump in 2016 has thrown an already flawed system of providing health care into total turmoil. If you are self-employed or starting a business, this is a nightmare. Unfortunately, for the foreseeable future, getting decent health care will depend on what state you live in.
This is an issue which requires its own separate blog post. Since I am self-employed and follow this issue, I will be addressing it in-depth in a future post. But I want to touch on some broad issues here.
One thing to bear in mind is this: The states with the lowest taxes, tend to have the worst services and options with respect to health care. The one exception to that rule, possibly being the state of Washington.
States which traditionally have not excluded pre-existing conditions…
If you are self-employed or working on a startup, or do not have access to Medicare or employee insurance, you need to read this. It doesn’t matter if you are in perfect health. That can change in an instant. Having good health and having access to decent health care has become an American wild-card in terms of financial security.
The Republicans have thrown anyone with a pre-existing condition to the wolves. They don’t care if you go bankrupt. And almost ANYONE with a serious illness that is not covered will go bankrupt in the United States. So, we have to look at which states traditionally covered people with pre-existing conditions before the ACA (aka ObamaCare) went into effect. Those states are California, Michigan, New Jersey, New York, Oregon, Vermont, and Washington. Note that these are mostly blue states and tend to be fairly high-tax states. These are states that will probably reinstitute protections for those with pre-existing conditions when (not if) the ACA implodes. If you have any kind of health issues, no matter how minor, or if you are planning to be self-employed, this situation must be taken into consideration.
What about states with high-risk pools?
If you wind up getting sick in a state with “high-risk pools” your insurance premiums are going to be astronomical and wipe out any gains you might get from lower state or local taxes. So bear this in mind. Here is a good link for information on healthcare in the US. Understanding this issue may save your life or prevent a bankruptcy.
Putting it all together…
At the end of the day, everyone’s situation is unique. This post set out to compile the information and factors that people who are thinking of relocating need to consider. It is more than just finding the best low cost-of-living cities. The choices have to work with your finances, lifestyle and personal situation. If you are still reading this post, you must have a compelling reason to do so! Please feel free to comment below. I would enjoy hearing from you.
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