HCOL vs LCOL Cities: Where to Live?

Choosing where to live is undoubtedly one of the largest decisions you will make in your life. How do you pick a HCOL vs LCOL city?

HCOL stands for “high cost of living” and LCOL is an acronym for “low cost of living”. Each geographic location has its shining moments and wavering flaws.

Hopefully this article will offer an in-depth analysis to help you navigate the tough choice. It will have a magnanimous impact on your personal finances and net worth!

Cost Index by State

This is a geographical representation of the cost index by state, with data from World Population Review. Hawaii sets the high bar with a cost index of 192.9, and Mississippi has the low with 86.1.

“The cost of living is defined as the amount of money needed to sustain a certain standard of living by affording basic needs such as housing, food, healthcare, and more.

The cost of living is often used to compare how expensive it is to live in one location compared to another and is also used as a big factor for people to determine where they want to be located.”

hcol vs lcol state cost index

Home Prices

Personally, I do not plan on owning a home until I am in my 30’s, but let’s get real here for a moment. Most Americans want nothing more than a place they can call their own.

This is why I wrote an article called “Reasons to Buy a Home“. These were some of the top reasons individuals might decide to purchase, rather than rent.

  • No Landlord
  • Consistent Mortgage Payment
  • Capital Gains Tax Break
  • Potential Appreciation
  • Mortgage Interest Deduction (if itemizing)
  • HELOC
  • It’s YOUR Home

When you own your home, you can choose your own renovations, paint a bedroom, and build a swing-set in the backyard for your children if you want.

Ultimately, it provides more flexibility and freedom for your family life.

The city you reside within will have a massive effect on the home you can afford to buy. Similar to food, experts suggest never buying a home with a monthly payment that exceeds 30% of your take-home pay.

But, how is that even possible if you live in a HCOL area? Honestly, it might not be!

In 2019, “The median asking price for a home in San Francisco is $1,299,000. Not the price for a luxury mansion or an expansive estate. That’s the price for the average home, including single-family houses”.

Juxtapose that with Dallas, where the the median home value is $226,145! This is one of the major reasons California has lost so many residents to Texas in recent years.

The average family could never even dream of buying a house in expensive real estate markets like Los Angeles, San Francisco, and New York City.

As lending standards tighten, a 20% down payment would become the norm again. This would force individuals to arrive with a $260,000 cash position (highly unlikely).

Apartment Rental Rates

For those who can’t afford to buy (or don’t want to), they will be thrust into a competitive rental market. New York Times reporting shows “As Rents Outrun Pay, California Families Live on a Knife’s Edge“.

“The state’s severe housing shortage is driving up rents, leaving many lower-income families struggling to stay in neighborhoods they once could afford.”

Median family gross incomes in California hover around $60,000, despite annual rents costing around $16,000-20,000.

One may ask, “How can I think about saving money when after taxes, rent, food, and transportation I have nothing left?”

Solutions range from rent freezes and government intervention, to less stringent building and zoning regulations. The largest disparity between HCOL vs LCOL cities is in housing expenses.

Transportation

One of the better upsides to living in a HCOL vs LCOL city is that there’s no need to own a personal vehicle. I know many friends who have sold their cars before moving to NYC or Chicago.

The New York Times released a scathing piece on the ludicrous cost of parking in New York City. “For Parking Space, the Price Is Right at $225,000“.

“In Houston, $225,000 will buy a three-bedroom house with a game room, den, in-ground pool and hot tub. In Manhattan, it will buy a parking space. No windows, no view. No walls.”

In an article I authored, “How to Save Money on Driving“, I noted the average car payment in the United States has risen to $523 a month. This is before insurance premiums, gas, and maintenance too!

Sum and amortize these costs, and most American households have an average monthly transportation expense approximating $1,500.

The purpose of a car is to get you safely and timely from point A to point B, but public transportation can serve the same purpose. You ever tried to drive in NYC, Chicago, or LA?

It takes hours to go a couple miles! This is where reliable public transportation comes into play. Taking the subway requires no insurance premium, gas, or maintenance; you just buy a pass for one fixed cost.

Nevertheless, if you live in a LCOL city, you will definitely need a car to get to work or the grocery store.

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Urban planners have designed suburban sprawl for better traffic flow, and the public transport is less reliable (in my experience).

Education

For anyone with children, their education and personal development is of the utmost importance. Parents sacrifice so much to give their offspring every opportunity to meet success.

Depending on your local school district, the coursework can range from superb to non-existent. Take Stuyvesant High School in NYC for example.

“Stuyvesant High School is ranked second within New York. Students have the opportunity to take Advanced Placement® coursework and exams.

The AP® participation rate at Stuyvesant High School is 94%. The total minority enrollment is 81%, and 46% of students are economically disadvantaged.”

Source: US News

New York City has some of the best public charter schools in the entire country, but this can’t be said for all local school districts.

Contrast New Mexico, with a 28.9% drop out rate, to Massachusetts (11.7%). Business Insider compiles an annual list of the best (first list) and worst (second list) public education states.

  • Massachusetts
  • New Jersey
  • Connecticut
  • Virginia
  • Vermont

Notice anything? The top states seem to be concentrated on the eastern sea board with very HCOL.

  • New Mexico
  • Mississippi
  • West Virginia
  • Louisiana
  • Arizona

Groceries

Most personal finance experts recommend spending 10-15% of your net pay on groceries or dining out. However, this amount can vary significantly for residents scattered across the United States.

One of the most startling statistics are the number of citizens living within a food desert. These deserts tend to concentrate in HCOL areas, where there’s a mismatch between personal incomes and business operating expenses.

The USDA defines a food desert as “areas where people have limited access to a variety of healthy and affordable food”, and they have urged local leaders to take swift measures to address the crisis.

Anyone who has ever bought their own groceries can attest to how much cheaper it is to prepare your own meals, rather than rely on a local fast food chain or restaurant.

Food deserts massacre household food budgets, and they continue to accelerate the growth in hypertension, diabetes, and cardiovascular disease.

LCOL metro areas tend to have far fewer food deserts; in fact, Des Moines (my home town) has a full-scale grocery store located in the heart of downtown.

Business Insider noted, “The average cost of a mid-range meal for two people at an LA restaurant is $56. That’s $11 above the national average.”

Taxes

As the infamous Benjamin Franklin once warned us, “There are only two certainties in life: death and taxes”.

Currently, only seven states offer shields from state income tax (0%). Now, they recoup the revenue through other methods (tolls, property taxes, sales taxes), but that’s a separate discussion.

  • Alaska
  • Florida
  • Nevada
  • South Dakota
  • Washington
  • Wyoming

Not all states are tax havens, and beginning in tax year 2018 (under the Tax Cuts and Jobs Act), taxpayers cannot deduct more than $10,000 of total state and local taxes.

This has been a horror story for high earners in high tax states. Previously, residents could deduct all their state and local taxes from their federal return, lowering their effective rates. Not any more!

These are the states with the largest, disproportionate impact.

  1. California
  2. Hawaii
  3. Oregon
  4. Minnesota
  5. Iowa

Many people don’t know this, but a lot of HCOL cities actually charge a separate “city tax”. This is an additional income tax, tacked onto federal and state taxes. These are the top progressive rates.

  • Chicago (4%)
  • New York City (3.86%)
  • Los Angeles (2.25%)

There is even an entire shadow tax industry built around athletes and entertainers. Entertainment Tax Advisors notes the following compliance nightmare.

“Like all individuals, professional athletes are required to file income tax returns in each jurisdiction in which they provide services (both municipalities and states).

However, unlike the average employee, professional athletes often work in dozens of jurisdictions in a single year, meaning they have to file separate income tax returns for each city, county, or state they play.

This creates a tax compliance nightmare that is often referred to as the “jock tax” due to its particular application to professional athletes.”

As the saying goes, “It’s not what you make but what you keep!” A combination of high rents, groceries, and taxes can be lethal for an economy.

Quality of Life

I know some of you might not believe these words coming from my mouth, but there is more to life than dollars and cents. Happiness requires a balance of financial, spiritual, mental, and physical wellness.

When contrasting HCOL vs LCOL cities, there is a major difference in access to museums, culture, diversity, professional sports, civics and theatrical events, bike trails, and restaurants.

This is one of the main reasons I love to travel and explore so much. NYC is expensive, but they have Broadway, the New York Yankees, and Central Park. You can’t find a combination like this anywhere else!

Every person is different, and they will have dramatically varying priorities to increase their own unique quality of life. Like everything in life, it’s simply a balancing act and requires self-reflection on your values.

Final Comparison

The inputs for this final chart came from Zillow, Numbeo, and Intuit Turbo Tax. I tried to select a variety of cities from across the country.

HCOL vs LCOL

Choosing where to live is undoubtedly one of the largest decisions you will make in your life. Should you pick a HCOL vs LCOL city?

I prefer to live in a LCOL city and invest my extra income. I can travel to other locations on vacation, but no strategy is inherently “right” or “wrong”. It’s all a matter of personal preference and being happy!

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