A survey done earlier this year by Forbes Advisor found—drum roll—that people who live in states with a lower cost of living are able to save more than those who live in more expensive places. Make that an eye roll rather than a drum roll. While I love research that expands my knowledge base and gives me new ideas, I am annoyed by research that tells me something obvious.
To identify states where it is most difficult to save, Forbes Advisor compared all 50 states and the District of Columbia across 10 metrics spanning four key categories: income and debt, cost of living, taxes, and housing.
Hawaii tops the list as the state where it’s most difficult to save and where the cost of living is highest. Rounding out the top five are California, Maryland, New York, and New Jersey.
At the opposite extreme are the states where residents find it the easiest to save money thanks to the low cost of living. North Dakota ranks first, followed by South Dakota, West Virginia, Missouri, and Ohio. In general, the Northeast dominates the ten states where saving is hardest while Midwestern states rank heavily in the ten where saving is easiest.
One of the factors behind these not-so-surprising results is the disproportionate relationship between wages and the cost of living. While wages can tend to be somewhat higher in states with a high cost of living, the difference is not enough to compensate for the living expenses. For example, in March 2019 I wrote about the findings of a survey I did of fee-only financial planning firms from all parts of the country. I found that a Lead Financial Planner (one with 10 years or more of experience) earned $120,000 to $160,000, with a median salary of $135,000. However, while earnings were the same for planners in Redwood City, California, and Rapid City, South Dakota, the cost of living in Redwood City was three times higher than in Rapid City.
Is there any question why people living in lower cost-of-living areas save more?
Then why do people choose to work and live in expensive places? I’ve worked with more than one overspending client who could have maintained their desired standard of living and also funded their retirement plans if they moved from a high cost-of-living state to a low cost-of-living state. I have an acquaintance who moved to Hawaii in his 40s to fulfill a lifelong dream, only to find he could barely eke out a living through house-sitting and working two low-paying jobs with no benefits. In the decade he spent there, he was unable to save for retirement. When poor health forced him into retirement in his mid-60’s, his only income was a meager Social Security benefit.
Yet pointing out the financial realities is seldom enough reason to persuade someone to relocate. Nor are finances alone necessarily the “right” reasons to choose where to live and work. Research tells us that around 90% of all financial decisions are made emotionally, and the reasons people choose to live in high-cost-of-living locations are clearly emotional.
Those emotions are tied to a variety of factors: closeness to family and friends, familiarity, stability, a sense of belonging, or the pleasure of living in a place someone sees as paradise. The benefits and amenities of life in a high cost-of-living area are experienced in the present. The future benefits and amenities that come with sufficient retirement income are vague ideas for the future. The here-and-now emotional rewards of living in a place that feels like home often far outweigh the future financial benefits of moving.