Tag Archives: lifestyle inflation

3 More Hidden Costs of Living in a High Cost of Living Area

Cost Of Living Expenses Sky High Monitor Showing Increasing Costs
After writing my previous post about hidden costs of living in a high cost of living area, I thought of a few more. They were so hidden that it never even dawned on me that these costs exist. Actually, I think I knew they were there but since I’ve always lived in a high cost area, I just thought that it was normal. However, after reading personal finance blogs of those who live in lower cost areas, I’ve realized that there are some more increased costs that those living in a high cost of living area face.

Emergency Fund

Personal Capital, which is an online wealth management tool I use to keep track of my financial accounts, sent me an e-mail last weekend that my cash flow was high and I should consider moving some into my investment accounts where it can grow. The standard advice from most financial advisors is to keep six months of expenses in an “emergency fund” just in case you have, you know, an emergency. They also advise you to keep this money in a liquid account so that you can access it easily, such as a “high yield” savings account. When you live in a high cost of living area, you naturally have higher expenses and if you followed the rule of thumb, you’d have to keep a large amount of money in an emergency fund which earns you a pittance, and actually loses money over time due to inflation.

To combat this, you can instead put some of that money to work for you. Having funds that you’ve labeled “for emergencies” sitting in your bank account is not absolutely necessary. I don’t view my money in buckets, i.e: emergency fund, vacation fund, etc. In a true emergency, my entire portfolio is an emergency fund. Plus, I can always use my credit card in an emergency which would give me some time to access my less liquid accounts. A Roth IRA can act as an emergency fund, but make sure you know the rules about withdrawing money from it. However, this might not be the right choice for everybody. My family is a dual income family where both my wife and I have stable jobs, so I feel more comfortable with a smaller emergency fund. I would feel differently if I was working as a freelancer or in a volatile industry.

Down payment for a house

This is the same concept as the above. When you live in a high cost of living area, housing is usually the one expense which costs a lot more compared to lower cost of living areas. Similar to emergency funds, the personal finance experts tell you to put the money you’re saving for a down payment in something safe since you will likely need the money in a few years. Short-term investments rarely include stocks so once again, you’re putting savings for a down payment in CDs, high-yield savings accounts and maybe bonds. Those investment vehicles have lower returns than stocks but are safer and less volatile. This is something I’ve struggled with in the past and still struggle with now. Where should I put the money I want to save for a down payment?

A year after my wife and I got married, we started hunting for a co-op since buying a house is practically impossible for a young couple here in NYC, unless you make an extremely high income or have very generous and rich parents. My wife and I threw our paychecks into a savings account but after looking at a few places decided that we were better off renting for the time being. However, in the back of our minds, we always thought we would buy a place at some point in the near future. We just didn’t know when. So there was a chunk of money earning very little interest sitting in our bank accounts. What hurts even more was that during this time, a bull market took off in the stock market so if we had invested the money instead, we would have earned a much higher return compared to the “high yield” 1% savings account. These are the opportunity costs of having to have so much more money in accounts that generate little if any return.

Temptation

I pride myself on having the strong will power to avoid keeping up with the Joneses, but maybe I have it easy. I don’t work in Manhattan. I work in government. Many of my co-workers bring their own lunches. When you work with co-workers or hang out with friends who go out to eat everyday, happy hour after work, and have name-brand handbags, cars, clothing, etc, it must be a lot harder to avoid the temptation to purchase those items as well. Even if you could resist spending wasting your hard earned money on status symbols , it is hard to always turn down invitations to go out. Plus, you don’t want to be seen as an outcast and they might at times be good networking opportunities to go out with your colleagues outside of work. I’m sure that temptation exists in lower cost of living areas as well and people living there also struggle with trying to keep up with the Joneses. But, with the amount of money that many people have in the high cost of living areas like NYC, LA, Silicon Valley, etc, it is even harder to avoid the temptation to keep up appearances.

If you live in a high cost of living area, do you have to keep a large amount of money in cash investments? How do you save/invest your emergency fund and house down payment fund? Do you think it’s harder to avoid temptation when you live in big cities?

I’d like to thank Kristin Wong for covering my first post about the hidden costs of living in a high cost of living area on Life Hacker Two Cents