Geographical arbitrage is becoming increasingly adopted as people are looking for ways to get financial independence when they retire. The term is coined by the Financial Independence, Retire Early (FIRE) movement that is advocating for people to combine extreme saving, investments and high-paying jobs to achieve their dreams when they retire.
What’s Geographic Arbitrage?
Geographical arbitrage is also referred to as Geoarbitrage and means earning and saving money in a strong economy while spending it in a place where the cost of living is low. What it means is taking advantage of prices in different towns or countries. For instance, if the cost of a one-bedroom house in Boston is $2,400 while in Florida it is $1,200, you can move to Florida to save 50% of your rental expense, at least, if your income does not depend on being in a specific location.
So the basic idea is to separate several aspects of your life in a geographic manner. The term flag theory was coined as a way to mentally put flags for each of these aspects:
- Passport or citizenship. Obtain a passport that allows plenty of travel freedom without citizenship based taxation like the US. Passports from Western Europe can be a good choice.
- Legal residence. In a place with low or no tax for your specific income.
- business base: a place to register your business. Again, you want no or low tax, but even more important when starting is a low administrative burden.
- Asset haven. A place with decent laws and low levels of corruption. Bitcoin has become a great digital store of value that is not tied to any specific country.
- Playground. A place to spend money, with low sales tax or VAT.
Geographical Arbitrage Opportunities
You can apply geographical arbitrage and end up saving a lot of money. The following are some of the ways you can profit from geographical arbitrage.
1. Student Loans
If you are a student and don’t have a family, you can apply geographical arbitrage by living where the cost of living is low. If you don’t have a family and many responsibilities, you can walk long distances. As such, you can rent a house away from the school where the cost of living is cheaper. This will save you high costs that could drive your student loan too high.
In the long run, you won’t have to take too many student loans to service rental expenses near the school. At the end of it all, you will have fewer obligations when you finish schooling.
Alternatively, as actual work experience is becoming more relevant than showing specific certificates, it can be a good idea to consider starting your own online business while living in a cheap location, instead of paying high tuition fees.
2. Retirement
You can also profit from geographical arbitrage to prepare for your retirement. Geographical arbitrage is a great way to prepare for retirement since you make money in a strong economy and you spend it where the cost of living is low.
For instance, if you are working in a town where the cost of living is high, you can look for a house away from the town where the rent is cheaper. If the rent in the town is $2,500 per month and you can find a cheaper house a few miles away for $1,500, you will be saving $1,000 every month. You can save the $1,000 and use it to build a house when you retire.
3. Starting a Business
You can take advantage of geographical arbitrage if you are in business. Starting a business can be expensive in some countries while in others it is very cheap. As such, you can opt to start a business in a country where startup costs are low. Alternatively, you can choose to start a business online instead of starting a brick-and-mortar business. By so doing, you will avoid the high costs of starting a business, especially before it can start making profits. You only really need a laptop and an internet connection to start an online business.
You can also take advantage of geographical arbitrage by starting a business where sales taxes are low. For instance, if one State requires 30% corporate tax while in another one it is 20%, you can opt to start a business where corporate tax is low. In the end, it will save you a lot of expenses which you could have otherwise spent on corporate tax.
4. Avoiding Taxes
You can also profit from geographical arbitrage by avoiding state income. Note there is a big difference between evading taxes, which is illegal and avoiding tax, which is completely legal. Of course the line between evasion and avoidance is constantly moved by governments.
Some US states have higher taxes compared to others. For instance, in South Dakota and Wyoming, there is no personal or corporate tax. As such, you can start working in such a state and avoid paying income taxes.
Also, you can opt to buy a house where property taxes are low. You can pay for a house three times cheaper than what you would have paid in another state. This all depends on property taxes. You can save enough by getting avoiding unnecessary expenses while applying geographical arbitrage and it would help you buy a house where property taxes are low.
From a more global perspective, there are almost 200 countries, each with their own tax system. If you are not tied to a US citizenship and you are flexible about where you live, you can look at countries where taxes are lower or even 0. Many countries also have specific programs that give lower or no tax for a specific period for people who move there. Even high tax countries such as the Netherlands and Belgium. The UK and many former colonies like Cyprus and Malta have so called non-domicile tax regimes.
5. Get paid in Harder Currencies
The other way to profit from geographical arbitrage is by getting paid in harder currencies from developed countries. By so doing, you become immune to depreciation in your country’s currency. If you work online and you get paid in Euros, which is somehow stable, when your local currency losses value, you will earn more when you convert euros to your local currency. You will be earning more than you would if the local currency remained stable.
The most extreme case of this would be to get paid in bitcoin and not spend these funds for at least 4 years. Since inception bitcoin has gained at least 10x over any 4 year time period.
6. Earning Money in Stronger Economies and Spending It in Weaker Economies
The other way you can profit from geographical arbitrage is by making money in strong economies and spending in cheaper economies. For instance, you can be earning while in San Francisco and opt to spend the money in Ecuador where the economy is weaker. The cost of goods and services is usually lower in weaker economies compared to strong economies.
In the end, you will be earning a high salary while spending very little, thereby leaving you with a lot to save.
Final Word
The whole idea about geographical arbitrage is to help achieve financial independence. To spot geographical arbitrage opportunities, you just need to identify areas where you can make more money and where you can spend less. Essentially, it is about taking advantage of the cost difference between two locations. It helps one avoid high expenses and save money for a later date. It is a great way to save money and prepare for retirement.
