Cost Arbitrage and Hacking Life for Digital Nomads and Remote Workers
The cost arbitrage for digital nomads is one of the strongest engines of the nomadic lifestyle, and one of its great benefits. In easy terms, the cost arbitrage (also known as hacking life) is created by working online for clients from developed countries, thus receiving a “western salary”, while choosing to live in a country or city with low cost of living.
In some countries, the costs can amount to a third or even a quarter of the costs in developed countries. But the cost arbitrage also exists within the countries themselves, as capital cities and major hubs tend to be much more expensive than other cities, by 20% or more. This means, that even if you live in a low-cost part of your own country (e.g. Alabama), but pick clients from a high-cost city (e.g. San Francisco), you can benefit from the arbitrage. This is why it’s relevant to remote workers and digital nomads alike.
A quick check of the most trending digital nomad hubs shows that many of those hubs are low-cost cities. This allows remote workers and digital nomads to enjoy the cost arbitrage. Those locations became popular not just because they are cheap, but mostly because of providing a high-value. The idea is to get the highest quality of life for less money. This is the recommended measure for remote workers and digital nomad to focus on, which allows a more abundant mindset – considering what you get, and not only about what you spend.
An interesting phenomenon comes into play when focusing on the value received. I’ve noticed that when I’m staying in locations that wildly differ in the cost of living, my monthly expense still stayed relatively the same. The real change was in the quality of life and comfort. For example, Expatistan cost index shows Pasto Colombia is 70% cheaper than London, while I actually spent almost the same in both. What changed was the value and comfort I received. In London I stayed in 16-bed dorm rooms, cooked for myself and never thought about taking a taxi. And in Pasto, I take two taxis a day, eat only in restaurants and have a private room. We are driven by instincts, which makes us act thrifty when staying in expensive locations and also push us to splurge in a low-cost country.
How can you know what are the best countries supplying a high value for the low cost? You should avoid any country that is in total crisis (e.g. Syria, Venezuela at 2017) where not only life cost is cheap, but life itself is as well. You should also avoid countries that are cheap but don’t allow you to cater to your clients and generate revenue.
For digital nomads, the main reason to avoid a country would be an unreliable internet connection, so for now, most of Africa and countries like India are out of the question. You may live cheap there, but your revenue will take a massive hit due to lack of necessary infrastructure. Other factors to picking a location vary and depend on your personality and specific needs. For example, I only stay in places that have coworking spaces and don’t have much pollution. A good place to start understanding the costs and comparisons between cities is Expatistan, where you can feed two locations and see the difference in costs.
One more powerful factor to take into account is currency fluctuations. As complicated as it initially sounds, the highest value countries are usually the ones that have experienced a massive hit to their local currency. This keeps the price the same it was for locals while making it much cheaper for those who are earning foreign currency.
The following chart, for example, shows the exchange rate of Dollars to Ukraine’s currency, the Hryvnia. In 2008, Ukraine was a relatively low-cost country and you could receive 4.75 Hryvnia’s for 1 USD. Today you can receive almost 28. The bottom line is that as most wages and prices stayed the same, a foreigner can now get six times more of the local currency for one Dollar. This is a radical example (and inflation in those countries offsets part of this phenomenon), but there are many others. Substantial fluctuations happened recently in Colombia, Russia, and the Eurozone, making it much cheaper to travel if you earn in another currency. The problem is that devaluations happen for a reason. In some cases like Colombia and the Eurozone, those were healthy adjustments, while in other cases like Venezuela and Turkey, devaluations had to do with deteriorating security and instability. Do your research before you travel.
It should be noted that the cost arbitrage is a huge global phenomenon. Its implications on remote work and digital nomads are simply a small dent in the real consequence, which is globalization. Companies in rich countries are hiring more and more people from developing countries and shifting a lot of their manufacturing to those countries since costs are lower there. Remote workers and digital nomads are like surfers who are surfing a giant wave, but often think they are the wave themselves. It is a global trend and is much bigger than any lifestyle.
Working remotely is not the only option of taking advantage of this arbitrage, although it’s probably the most comprehensive one. Other methods include working half a year in a developed country, and traveling the other half to a low-cost region, or retiring early in a country with lower costs.
The advantages of the cost arbitrage are obvious, but let’s go over them anyway.
Live like the rich and famous
The first one, that was already mentioned, is an increased quality of life. Go to the Ukraine where a full dinner in a posh sushi restaurant will cost $4, or take a comfy 12-hour night train with a bed for $10 and it will become clear.
Learn new skills
Low-cost locations allow more than just comfort. Since wages are low, learning new skills such as a new language, or taking private Salsa lessons will be at about fifth or the price than in the US or Europe. I’ve taken Salsa lessons in Colombia ($7 per hour with a private teacher), mechanics and a car-repair course in Peru, Skiing lessons in Bosnia, and Russian private lessons in Belarus. Low-cost countries can be a great boost to your skills and knowledge if you have the motivation to learn about the world.
By working online from low-cost countries, your revenue will far exceed your expenses. This will allow you to save a substantial amount of money for the future.
You can finally have a startup or go independent
For those who aspire to become nomadic entrepreneurs, living in a low-cost location makes a lot of sense. You can start working on your startup, or even become an independent freelancer and make sure that as your revenue receives a massive shock, your expenses will lower as well. Having oxygen to maintain the initial period of entrepreneurship by reducing your costs makes a lot of sense. In later stages, as you decide to scale your business, staying in low-cost countries will also allow you to hire talented people at a lower cost.
We are moving on to the disadvantages since not all is perfect in the world of hacking costs. This is especially true since it involves leaving the advantages of the developed world and switching to countries that are developing.
There is a limit to your success when you get away
Hacking life costs is perfect if you’re keeping a low profile and want to live comfortably. However, if you’re interested in creating the world’s next Uber, or become as famous as Tim Ferriss, it will be extremely hard to do so from Albania or Paraguay. Building a massively successful business or establishing a powerful personal brand requires you to stay in the “center of the world”. Cities like New York, San Francisco, and London allow people to become great by networking and constant opportunities which come up. The reason why those cities are expensive is due to the high density of successful businesses and population. If you want to make it big, the cost arbitrage will do you more harm than good.
Lower cost countries usually have worse health services and doctors than developed countries. This, of course, differs from on country to the other, but it’s probably true to say that when you go through a massive health emergency, you’re much better off staying in the developed world. For less urgent procedures, such as dental work, and physiotherapy this effect is reversed and you are probably better off going through those procedures in lower cost countries (e.g. East Europe is very cheap for dental procedures).
Culture and Crime
Developing countries usually have much higher crime rates than developed countries, due to poverty and lack of resources. Therefore, staying there for a long period will require you to take extra care and expose you to higher risks. On the cultural side, some things that happen in developing countries can be quite frustrating if you are the frustrated type of person. Anything from crazy pollution and destruction of nature due to lack of regulation, to hundreds of homeless people, corrupted governments, vast alcoholism and drinking problems, and zero respect for you as a pedestrian trying to cross the street.
If you’re traveling as a family, the problems are even bigger. Developing countries usually have a poor level of education, unless you can afford private international schools in your location.
Fear of change and lack of ambitions
Low costs can be addictive, as it is much harder to decrease the quality of life than increase it. Once you get used to the “good life” in low-cost countries, it will be very difficult to get back to living in developed countries. In addition, the low cost may also give you the illusion that all you need is $1000 of income to live well, so you won’t aspire for more and work less than needed. Life will then hit you by either making you get back to your country or by increasing costs where you stay (currency fluctuations can go both ways). This risk is dependent solely on your psychology and you can make it vanish by the right mindset, but you should be aware of it.
You are not really going to save all this money as a digital nomad
The first thing to remember is that tourists pay a premium price. Thinking that arriving at a place will automatically set you in the same spending level as a local is wishful thinking. Firstly, the lack of information brings on mistakes and loss of opportunities that only locals are exposed too. We’ve discussed the reasons for why staying longer saves money in comparison to frequent transitions.
One more thing to consider is your actual spending tends to stay the same and the quality of life is what changes most (London vs. Pasto). Although low-cost countries allow you to save crazy amounts of money if you maintain the same quality of life as you had in the developed world, this is rarely the case. You will live much more comfortably and spend more when the prices are low. This is good, but also means that real saving value is decreased.
In conclusion, the living cost arbitrage is real and powerful but comes with a few substantial disadvantages. My advice is to take advantage of it, but not get addicted to it. Make sure you can achieve a good enough quality of life to sustain you in the long-run, living wherever you want.