Geo-Arbitrage: Income and Expenses Correlated?

The other day I was reading yet another forum post debating the definition of middle class. It is a well trodden topic, and one I will not belabor in this post. Some day I may decide to write on this topic. No, instead today I want to talk to you about the correlation of income and expenses in a location.

The Definition of Middle Class Changes by Location

The middle class definition came up recently is a forum post on rockstar finance forums. I began to respond to a persons question about the definition of middle class in the text book way of statistical bracketing of income. Then I took it one step further and mentioned that location changes these statistical points. The middle point of income, median or mean, are significantly different from Appalachia to Silicon valley, to look at the extremes. A 100K in one would make you almost king, in the other you’d be scrapping by. No sooner did I type this concept though then I realized there was another layer to explore, the topic of this post, income and expense correlation.

Are Income and Expenses Correlated Geographically?

The reason I had assumed for the discussion that location was important is because I was considering the median income as a corollary for costs. San Francisco costs more, thus middle class has to make more. The problem is, while this holds true in my extreme example, what does it say for the more moderate example? Do income and expenses of an area have a correlation? How does that play into your choice of living location?

Location Definition

Let’s first look at the definition of location. I live in the state of Delaware. The state of Delaware has a median income of $57,756.  But a state can cover a large area of different demographics. Zooming in to county, the county I live in, New Castle Delaware, has a median income of $56,368 outside the lone city, Wilmington. Ok, this is pretty consistent with the state.

Higher income Area

Things however get more interesting if you go another level down. I live in a moderately sized postal code of Delaware. This postal code has a median income just around $100,000. Nearly double the states income level. I live on the edge of this postal code, my neighboring postal code has a median income of $130,000. I can walk through the woods in my back yard maybe a mile to cross the delineator. So if I were to throw out that number you would think costs are high.

Lower Income Neighbors and Expenses

But here is where things get interesting. I am also only 8 miles from the aforementioned city of Wilmington. I.E. I live 8 miles from an area where the household income is half what it is locally. So, provided I have a car and am willing to drive 8 miles to do any shopping (a given as since I live semi rurally, the nearest grocery store is just over 8 miles away), I can easily buy things from the same place you would living in the city. This does not quite throw out the correlation, but it certainly damages it’s credibility.

Housing costs

The one argument I can already expect in the comments is what about the cost of housing. Surely it’s higher where you live than those less expensive areas. You would be right in the context of Delaware, where the median house in my area is in the 413K range. In most areas of Delaware the median is closer to 250K. The thing is though, if I step outside Delaware there is a correlation here, but there are also many outliers.  Some places like cities in Texas, with the abundance of flat land, tend to have lower price to income ratios simply due to zoning laws and land availability. Theres more to the situation then the wealth of the occupants. As I talk to other bloggers I realize that home prices in Delaware are incredibly cheap compared to many other locales, as are the tax rates on that property (some of you would cry if I told you my property tax bill). I am definitely living in an outlier, semi rurally in Delaware.

Correlation between Income and Expenses, Debunked

So obviously while there may be some sort of correlation between high income in an area and expenses, there is no guarantees. But what does that matter?

Benefits of the gap between Income and Expenses

•  Well the obvious one is if your just starting your career and you are considering a relocation. Look for the area with low expenses to income to get ahead. I routinely hear of the young folks at my companies Silicon Valley site complaining about how hard it is to survive there on what we pay. Well, unless you really want that culture it’s probably not the best place for someone just starting out financially (unless of course you are a rock star IT person). Conversely if you picked a place like Texas, Delaware, or North Carolina your income will take you so much further, allowing for a higher savings rate if nothing else.
• The importance does not end with relocation though. It points to the need to consider mobility in a location. The thing I did not mention in my shopping comments were that there are higher end grocery stores in my area. If I lived on the other side of town they might even be closer to me then the cheaper ones in the city. They definitely do mark up the price for my more affluent neighbors. Part of the reason we chose the positioning of our home was access to these cheaper areas via routes that avoid major traffic choke points. That allows us to go to these places to shop. Similarly Delaware itself is more of one big corridor for getting other places. The point here is even when purchasing a home in a distinct area it’s worth considering the ability to get to other areas with lower financial costs and things to do.
• We can take this one a step further regarding the cost of a home. By living in the 100K area on the edge of the 130K area my home price was slightly less. Why? I didn’t quite have the zip code cache of my neighbors. Never mind that kids share a school and I can drive less than a mile and be in their neighborhood. When looking for a home or rent consider if you can drive a mile or two down the road reducing your costs significantly. For the record the median house cost in the town next to mine is closer to 600K. Your mileage may vary here as it is a tradeoff with the cost of a commute, a post for another day.
• We can even apply this to our middle class discussion. Is a person in Delaware making 130K a year middle class? By statistics likely no. Is the same person making 130K a year middle class if we zoom in on the most expensive zip code? By statistics likely yes. Can they live within 10 miles of each other?  Possibly.  There are lies damnable lies and statistics. Zooming in or out changes the story.
•  Just because you live in a high income area does not mean you need to keep up with the Jones, having a high cost of living yourself. There is more pressure to do so because you see your neighbors performance, but that is a losing game. Much of how you spend and what your spend is in your control regardless of your location. Sure some have higher housing entry costs, or even higher food, but there are usually ways around it with some ingenuity (perhaps excluding the horrible traffic in the Silicon Valley area). Just like in our discussion about financial independence, income has nothing to do with how much you need to prosper or even survive. It’s your expenses that matter!

Have you considered the gap between expected income and expenses when evaluating an area?