How to Become a Millionaire in 10 Years: High Cost-of-Living Edition

Podcast Summary

• Living in High Cost of Living Areas: Challenges and Opportunities: Living in HCOL areas can limit savings for long-term goals due to high essential expenses, but the opportunities and lifestyle they offer must be considered.

  Living in a high cost of living area (HCOL) like New York, San Francisco, or Seattle, can make it challenging to save for long-term financial goals such as becoming a millionaire within 10 years. While earning more money is a solution, the high cost of essential expenses like housing and childcare can outweigh any potential income increase. These expenses could be mitigated through policy changes. However, it's essential to consider the trade-offs of living in an HCOL area, including the potential for limited savings. The definition of an HCOL area includes cities with a lot of job opportunities, culture, and entertainment, which often results in high demand for limited land and housing. The top 10 most expensive cities in the US, according to Investopedia, are primarily located on the coasts or in the case of Honolulu, in the middle of the ocean. Despite these challenges, many people choose to live in HCOL areas for the opportunities and lifestyle they offer. It's crucial to understand the financial implications and make informed decisions based on personal circumstances.

• Living in Expensive Cities: A Significant Financial Burden: Living in cities like New York, Hong Kong, Geneva, London, and Tokyo requires substantial income to cover high housing, income taxes, and living expenses, making saving and investing a challenge.

  Living in expensive cities like New York, Hong Kong, Geneva, London, and Tokyo comes with a significant financial burden. For instance, in New York City, the cost of living is approximately 238% higher than the national average. The median home price in Manhattan is about $995,000, and income taxes are among the highest in the country, adding an additional 10.2% to overall expenses. Rent for a 1 bedroom apartment is $4,331 per month, and the cost of living for a single person is estimated to be around $75,100 per month. These numbers highlight the financial challenges that come with living in expensive cities and the need for substantial income to maintain a normal lifestyle while saving and investing aggressively.

• To become a millionaire in a decade in New York City, you need a high income: You'd need around $260,000 for a single person, $350,000 for a couple, and $415,000 for a family of four in pretax income to have a chance at reaching millionaire status within a decade in New York City.

  Living in New York City and becoming a millionaire in a decade requires a significant income. Based on the data from an informal poll and calculations, a single person would need to earn approximately $260,000, a couple around $350,000, and a family of four around $415,000 in pretax income to make this a reality. These incomes are well above the median household income in New York City, which is $67,046. Even if one aims to become a millionaire in 20 years instead, the required pretax income remains in the low to mid six figures range. With poverty rates in New York City being higher than the national average, it's clear that most New Yorkers are not earning the income necessary to save and invest to reach millionaire status within a decade. The trend of cities becoming richer seems to hold true in the case of New York City.

• Urban living offers smaller expenses and increased opportunities: Cities provide more affordable alternatives through smaller living spaces, less car reliance, and greater access to jobs and public transportation, outweighing the higher costs for many.

  While cities can be more expensive in terms of housing and certain necessities, the way of life itself often leads to fewer large fixed expenses due to smaller living spaces, less reliance on cars, and greater access to public transportation and job opportunities. Urban areas tend to be densely populated, fostering a sense of community and diverse encounters. For those struggling with income or high expenses, cities offer alternatives like shared housing and public transportation that can be more challenging to implement in suburban areas. Despite the higher costs in some areas, the benefits of urban living, such as increased opportunities and community, can outweigh the challenges for many people, particularly young people.

• Living in Expensive Cities: High Earning Requirements for Retirement: To retire within 20 years, singles in NYC need $195k, couples $131k-$170k. Saving in expensive cities is challenging, but aggressive saving & investing in lower cost areas can help catch up.

  Living in expensive cities like New York comes with significant financial challenges, such as high poverty levels, low median incomes, and high costs for housing and childcare. To retire within 20 years while maintaining an average lifestyle, a single person in New York City needs to earn at least $195,000 before taxes, and a married couple with children each needs to earn between $130,751 and $170,000. These high earning requirements can make it difficult for many people to save enough for retirement, especially if they have children or other expenses. However, for those who can only afford to live in an expensive city for a limited time, the trade-off may be worth it if they are able to save and invest aggressively in a lower cost area later on. For example, if New York Nellie can only save $200 a month during her first 10 years in Manhattan, while Darcy Dallas saves $25,100 a month in a lower cost area like Dallas, Darcy will have over $400,000 more in investments after 10 years. To catch up to Darcy, New York Nellie would need to save significantly more once she moves to a lower cost area. This highlights the importance of making policy changes to address the root causes of high housing and childcare costs in expensive cities, as well as the importance of saving and investing aggressively for retirement, regardless of where you live.

• Considering the trade-offs of living in a high cost of living area: When deciding to live in a high cost area, consider affordability, career opportunities, industry relevance, family, and personal preferences to make an informed decision.

  Living in a high cost of living area like New York City comes with trade-offs. Nellie, for instance, fell behind Dallas Darcy in savings due to her expenses in New York during the first 10 years. However, she might have surpassed Darcy's earning potential if she had climbed the career ladder there. If Nellie had moved to Dallas and saved the same amount as Darcy, she would only be eight years behind. Career opportunities and industry relevance can significantly impact earning potential. While remote work makes physical presence less necessary, employees in the headquarters of a company may have an easier time advancing. When deciding whether to live in a high cost of living area, consider these questions: Can you afford to save enough to keep pace with the cost of living? Do you have family and friends there that improve your quality of life? Is your job or industry popular in the area? Do you see yourself living there forever or just for a specific period? Lastly, does living in the area measurably improve your quality of life or do you spend more time stressed about money than enjoying it? Ultimately, there are no right answers. It's essential to weigh the pros and cons and make an informed decision based on your unique circumstances.

• Focus on increasing income instead of just cutting expenses: If living frugally isn't enough, consider reducing large expenses like housing and transportation to free up more income

  If you're struggling to make ends meet despite trying to cut expenses, focusing on increasing your income could be a more effective solution than trying to trim every last penny. A common issue for many people is that necessary expenses like housing, education, healthcare, and food have risen faster than wage growth. If you're already living frugally, consider examining your largest expenses, such as housing and transportation, to see if there's a significant change you could make to free up more income. For example, if more than 30% of your take-home pay goes towards housing, it might be worth considering a move to a more affordable area or finding a roommate to help cover costs. Similarly, if your car payment, insurance, gas, and maintenance fees add up to more than 10% of your income, it might be time to consider a more affordable vehicle or a different mode of transportation altogether. Remember, small changes may not make a big impact, so look for the biggest lever you can pull to improve your financial situation.

• Examine larger expenses for savings: Consider going carless or reducing car usage, temporarily stop adding to high-interest credit card debt, or assess discretionary spending to save money.

  If you're struggling to manage your monthly expenses and get ahead financially, consider examining your larger expenses, such as a car or high-interest credit card debt. If possible, going carless or temporarily reducing car usage in a walkable or bikeable area could help save money. For credit card debt, try to stop adding to it by using only cash or a debit card, or consider a balance transfer to a card with 0% APR for a limited time. These short-term solutions can provide some breathing room to aggressively pay down the debt. Remember, it's important to assess your income, geographical area, and current expenses to determine where the financial squeeze is coming from. If none of these areas are the problem, it might be time to examine discretionary spending. Keep in mind that the cost of living and wage stagnation can make it challenging for many people to make ends meet, but tracking expenses can help identify areas for improvement.