Where you live isn’t always a decision you’ve made consciously. Life has a way of sending you to different places, whether you decide to put down roots near where you grew up, choose to attend a school that has a program you are interested in or have moved to be near a significant other’s work or family. That said, moving away from a place once you’ve settled into, it can be a tough decision and make for a difficult transition. However, if you’re living in one of the United States’ many expensive cities, moving can be one of the smartest decisions you make for your finances.
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Though expensive cities often bring with them higher salaries, many times the pay is not enough to compensate for a drastically higher cost of living. Certain items, such as cars and clothing, may only vary in cost slightly, if at all, but the fact that real estate is so much more expensive in certain cities puts huge pressure on most budgets. If your total housing costs (mortgage, property tax, insurance, etc.) are $2,000 per month in Wisconsin and $4,000 in California, your gross salary would have to be at least $30,000 to $40,000 higher in order to compensate. Then, beyond housing, Californians will encounter other smaller expenses, from food and tolls to gas and movie tickets, that tend to cost more and quickly cut into a budget.
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In addition to the higher cost of real estate and other goods, taxes in expensive cities and states can really eat into your income’s buying power. Not only do income taxes vary considerably by state, but sales tax and property tax can also add to the cost of living. For example, if you are a married couple making $100,000 per year in Texas, you’ll pay nothing in state income tax. However, in New York, that same couple will pay more than $5,000 to the state.
While a difference of less than $500 per month might not seem extraordinary to some, it is the impact over time that this sort of savings can have. If you were to invest that $5,000 per year and achieve an annual return of 8 percent each year, you would have more than $185,000 at the end of 18 years, which is a nice sum to put toward a college education or retirement.
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If moving right now is out of the question for you because of a job or other commitments, you may want to consider the option of retiring to a different location. Many retirees head to Florida not just because of the mild weather, but also because it has no state income tax and property values are lower. Even if you want to stay in your immediate area, assuming you can sell your current home, you could benefit from downsizing or moving to a less expensive town or city nearby. Remember, reducing your housing expenses not only allows you to save more now but also lowers your expenses in the future, meaning you may not have to save quite as much to sustain your standard of living.
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