Have you ever heard of geo arbitrage? If not: the term arbitrage originates from the financial sector and refers to gains you can make by taking advantage of different stock quotes, interest rates or prices that exist in different locations at the same time. Geo arbitrage is about taking advantage of the difference in “prices”. Specifically the difference between the income from one, and its purchasing power in a different geographical region. Therefore the name “geo arbitrage”.
Geo Arbitrage is a popular topic in the FIRE community. Why? When calculating the net worth necessary to give up paid employment, a lot of the followers rely on the 4%-rule. This approach is at the same time based on a multiplier of your estimated cost of living. So the lower your cost of living, the lower the net worth you need. That’s obviously attractive for those who’d ideally want to say good-bye to working for a living by the age of 30.
Stay on top of your cost of living
You can keep your cost of living low in a country like the US or Germany, of course. In the US, Pete Adeny who blogs as Mr Money Mustache has become the poster child for this approach. Even more extreme is Jacob Lund Fisker who was around with his blog Early Retirement Extreme some time before Mr Money Mustache.
There are German bloggers as well who promote a frugal lifestyle. Oliver Nölting of Frugalisten or Tim Schäfer on his blog TimSchaeferMedia. I, too, believe that becoming a victim of lifestyle-inflation is not a given. Although I’d chose a bit more of a balance between spending and saving than the extreme frugal. But there are costs of living over which you have limited control as an individual and which I expect to rise more quickly than the general inflation. Costs in the health system are one example.
Think twice before you “retire”
That’s why I’m not a fan of a real “retirement” in those years where it’s easiest to push one’s salary significantly up, or more easily find a new job in the event of being let go than with 50plus. To be honest, very few of the FIRE-bloggers actually live off their net-worth by the 4%-rule: almost all that I’m familiar with have started ventures after leaving paid employment that bring in some – in some cases a lot of – money. Or their partner continues working and the whole family gets health insurance through her or his employer. That’s just something you need to keep in mind when building your own plan for financial independence.
But back to geo arbitrage. Can you imagine to live in a different country for some time or even permanently? If you’d need less money to pay for a comfortable lifestyle there?
It doesn’t always have to be Southeast Asia
Southeast Asia and central America are favourites with the FIRE-community, just as with digital nomads. But if you live in western Europe there might be opportunity much closer to home that you haven’t thought of yet. I’m talking of the countries in central and eastern Europe that used to be allies of the Soviet Union or belonged to Yugoslavia.
On Numbeo you can compare costs of living between different cities world wide. The data quality seems to be pretty good to me. And you can find a current overview of costs of living across Europe.
If you are a citizen of one EU-country and geo-arbitrage into another (this will unfortunately probably not work for UK citizens anymore after Brexit), it’s particularly easy. You are entitled to access the health- and (possibly conditional on waiting times) the social insurance system. Things can be a bit bumpy in the beginning as I know from my time living in Paris since the national systems are different. But fundamentally European coordination works in this area.
I do think that we Europeans sometimes underestimate how cool it really is to be able to experience so many different countries and cultures within short-distance. That’s something I always notice when Americans enthusiastically tell about their multi-country trips to Europe. Like Justin of RootofGood last year. And it reminds me of how much I haven’t seen yet in our own part of the world.
Plan B: A house in Hungary
We have actually built in geo arbitrage as plan B on our journey to financial independence as well. But that came as more of a coincidence. In 1999 we fairly spontaneously bought a house in a Hungarian village as a holiday home. Not far from Lake Balaton and the hot springs resort Heviz.
At that point Hungary didn’t belong to the European Union. And I look back with horror at the waiting times in front of the Austrian-Hungarian border. That’s another one of these things where I sometimes feel we might have come to take the conveniences of the EU too much for granted.
Quick dive into my personal story book: If you’ve ever been in the situation that A CHERISHED FELLOW TRAVELLER, and no, it wasn’t the child 🙂 , optimistically assumed his passport was still valid – it always was those past years, wasn’t it? – been refused entry at two different Hungarian border crossings after a 12-hours-drive, and instead of enjoying a nice glass of wine on your own terrace in the evening now have to find some rooms around high-season Lake Neusiedel, you will definitely VERY much appreciate open borders within the EU afterwards. (This had to happen on a Friday, of course – the consulate in Wien was closed over the week-end. And this particular time my sister had come with us who had envisioned a different start to her holiday as well…The area around Lake Neusiedel is very nice, though, so all ended well).
A different kind of activity-holiday
If you think, excuse me, did I get this right, you bought a holiday home? That’s surely an unnecessary luxury? Absolutely, any second home is obviously a luxury, and you can well do without it. Our idea at that point in time was to complement our 1.5-bedroom apartment in the city with a place for the holidays where two adults and one kid could spread themselves out a bit more.
And that for the price of a compact car, an amount we would have spent on other vacations throughout the years as well. Unexpectedly, my parents who had been going to France for their holidays whenever possible, were interested in using the house and exploring Hungary as well. And agreed to contribute a third of the price, and to chip in for renovations and upkeep for some time in return.
At that price-point we obviously didn’t get a new house even back then. But we very much enjoy renovation and fitting out properties. So we took “activity-holidays” for years instead of lying on a sunny beach. That wouldn’t have appealed to us much anyway.
I’m happy to say our son has fond memories of these vacations as well – although they were mostly unspectacular (hmmm, one of the exceptions see above. Another was when our car got stolen on a day-trip to Budapest. We were lucky to have my parents-in-law staying with us at the time, so they could take us back into Germany with their car. A VW Golf stuffed with 5 people, a dog, and a lot of luggage. Not a very jolly voyage, I have to report). Since we put up a bunk bed in our son’s room and our car was sufficiently big, he could always bring a friend. That’s quite nice of course, when you’re an only child.
Things changed a lot in 20 years
It’s been quite exciting to follow how the infrastructure developed in our host country. In the beginning, we had to drive more than 100 kilometres to the other side of Lake Balaton for a DIY-store. The IKEA parking lot in Budaörs, on the outskirts of Budapest, looked different from any IKEA parking lot we’d ever seen before. Not packed to the limit, just a few scattered cars. And our son was treated to 2:1 childcare sessions in “Smaland” on our first trips there. Prices were high in local comparison, however, and IKEA was more of an expats-haunt at that time.
Nowadays Obi and Praktiker are omnipresent. Motorways keep being expanded and connected. Last summer, glass fibre cable was laid in our village of less than 2,000 souls. Not everyone as lucky as that in rural Germany to put it mildly. Hungary is smaller, of course, and a lot of projects were and are co-financed by the EU.
Our Plan B
Originally we thought of selling the house again when our son would stop going on vacation with us. But then Plan B came up. When I wasn’t happy with my long-distance-commute job any more, I calculated how much F***-You-Money I would need to bridge the time until we could pay-off the remaining loans on our rentals without a steady income. (Eventually we did not pay off the loans for tactical reasons, but that was I thought at the time).
I calculate how much “passive” income we need long-term conservatively, and don’t use the 4%-rule. So to be able to sleep calmly at night, we needed a fall-back scenario should my husband’s salary break away before we reach our full target. Our house in Hungary provides an ideal basis for this: we could sell our paid-off house in Germany, rent a small apartment, and spend a lot of time in Hungary. This would immediately free a big chunk of capital to be invested in a world ETF. At the same time, our cost of living would come down significantly, resulting in less income needed.
I’d obviously prefer for us not having to rely on the fall-back solution, and being able to treat ourselves to the luxury of our second home as long as we like. When my parents were pensioners they spent a lot of time in Hungary, particularly in spring and fall. Traditionally not the best weather seasons in northern Germany. In Hungary it’s usually already or still warmer than here. And it rains less often.
If we were able to spend more time there, we could finally use our garden properly. We have an orchard, and there is a vegetable patch. I don’t think we’ll ever become real homesteaders like the “Frugalwoods”, going by our experiment in organic gardening. But who knows, the tomatoes in our raised balcony bed turned out quite well after all…
Not to leave you with the wrong impression: there are things in Hungary that we don’t like. We aren’t happy with the current political situation, for one. Our personal experiences in all those years have been shaped by openness, hospitality and helpfulness. I hope this won’t change in the future. But as I don’t think we’d ever permanently leave Germany, there would always be a quick way back. In the literal sense. Another advantage of geo arbitraging within Europe.
So why not give geo arbitrage “right in front of your door” some serious thought?
Have you ever thought about geo-arbitrage? Or even some experience doing it? Which regions or countries do you find interesting? Let’s talk about it in the comments.
Financial Independence Rocks!
Heiko QuantJune 11, 2019 at 1:41 pm
I think there is a lot to consider when thinking about geo arbitraging. Sure, Europe ist probably the best region to do it, since it offers both legally unrestricted mobility and significant differences in the cost of living. In terms of cost, moving from west to east is certainly most rewarding. In Terms of lifestyle, culture and language (and weather) moving southward is an attractive option. Personally I think that I would not be up to the challenge of learning Bulgarian or Romanian. I would probably accept the economic penalty of living in Italy, Spain or Portugal instead, where you have the chance to learn the language to some extend and get around with English otherwise. Just imagining the horror of applying for broadband Internet in Bucharest makes me dizzy. Maxing out the economic potential of geo arbitraging would be likely to turn into a real endurance test for myself. I would rather opt for a middle ground location or maybe not even be leaving the country but move to a region that is cheaper but equally well connected to the Internet instead.
Financial Independence Rocks!June 11, 2019 at 2:21 pm
thanks for chiming in. Yes, I can see your point about the diverse range of advantages. People might also have different attitudes towards the same country, like from having gone there on vacation before, or from their family or peers talking positively or negatively about it.
When in a country where I didn’t speak the language well, I found that mastering the everyday life provided some challenges, but it felt really cool when I had managed. And I’ve always come across very helpful locals. I can only vouch for Budapest as far as shopping and services are concerned, but you might have a pleasant surprise in Bucharest, too: when I still worked in the agency world, our colleagues in central and eastern Europe were among the most proficient in English ;-).
I like the idea of geo-arbitraging within your home country as well. Have to admit though, that the opportunities in the US seem better to me than in Germany, for example.
DianeJune 12, 2019 at 1:43 pm
I really like to travel and to visit foreign places. But I’d say actually moving to another country (possibly one with a very different culture) is something else entirely. I haven’t really given this option a lot of thought, so far, but I think I’d find it quite hard to leave all my people behind. To feel comfortable in a foreign country in the long run I think I’d need to be quite proficient in the language. And I wouldn’t want to stick out as a foreigner just from my appearance.
I watched an interesting documentary (German television, ZDF, 37’°) on retirees (not early retirees though) who had moved to Thailand – before you get the wrong idea, they weren’t all men ;-). This shed some light on the difficulties of cultural misconceptions and of truly”arriving” elsewhere and making real friends instead of being viewed as “the permanent foreigner”. So I guess for me only such countries would be a real option where I think I could manage to adjust to such a degree as to actually feel like I belong and where I wouldn’t be moving exclusively in a community of expats (as often seems to be the case with people who retire to foreign countries). All in all, I guess it would be easier to go to a foreign country to work there than to go there to retire, because through work you might have a better chance to become part of the normal community (depending on your job, obvs).
Financial Independence Rocks!June 14, 2019 at 10:08 am
Thanks for sharing! I think I know the documentary you mention :-).
Learning the language is definitely a key to feeling integrated. But from my experience you don’t have to be perfect at all, and I would actually consider the challenge of mastering a new language a positive part of any geo-arbitrage adventure. Another thing is to frequent the locals’ choices in markets, restaurants etc..
And I think it might be a bit of a generational thing as well: I don’t want to unfairly generalize but with the current generation of German retirees there seems to be a tendency to prefer eating the foods they know from home when they travel abroad, for example. It’s gonna be interesting to see whether this changes when members of generations X and Y retire, who’ve already done a lot more travel during their youth and working years.