Cost arbitrage – receiving a “western salary”, while choosing to live in a country or city with low cost of living.

The cost arbitrage for digital nomads is one of the strongest engines and benefits of the nomadic lifestyle. 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.

This arbitrage can be extremely powerful. In some countries, the cost of living can amount to a third or even a quarter compared to developed countries. But the cost arbitrage also exists within 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 are not interested in international travel, being location independent allows you to 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). This is why this phenomenon is relevant to remote workers and digital nomads alike.

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A quick check of the most trending digital nomad hubs shows that many of those hubs are low-cost cities. 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 and taking into account not only your expenses but also the quality of life you receive. I have found the focus on value other than cost to be the recommended focus on, which allows a more abundant mindset – considering what you get, and not only about what you spend.

How can you know what are the best countries supplying a high value for the low cost? Firstly, you should avoid any country that is in total crisis (e.g. Syria, Venezuela at 2017) where not only life cost is cheap, but so is life 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. 

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 in recent years. 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. The Ukraine 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 Britain, making it much cheaper to travel if your revenue is not in the local currency. The problem is that devaluations happen for a reason. In some cases like Colombia and Britain, 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 just a by-product of huge global phenomenon- 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. 

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 perk 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 to fully understand how powerful this arbitrage can be. 

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 snap out of your comfort zone and challenge yourself.

Save money

By working online from low-cost countries, your revenue should 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 to make sure that while the transition creates a massive shock in your revenue, your expenses will collapse as well. Having oxygen to maintain the initial period of entrepreneurship by reducing your costs makes a lot of sense. The cost arbitrage also alllows great benefits as you scale your business later on, as you can rent cheap offices and hire talented people at a much lower cost.

But not all is perfect in the world of hacking costs. The list of disadvantages is here to remind you what happens when leaving golden cage of the developed world and switch to low cost developing countries.

Leaving the center of the World

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 really big, the cost arbitrage will do you more harm than good. In other words, when you are the smartest person in a room (or a location), prepare for the fact you will naturally and gradually get closer to the average.

Health Risks

Lower cost countries usually have worse health services and doctors than developed countries. This, of course, differs from one 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 and planned procedures, such as dental work, developing countries might actually be great.

Culture and Crime

Developing countries usually have much higher crime rates than developed countries, due to poverty, corruption and lack of resources. Staying in those countries 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 vast alcoholism and drinking problems, and zero respect for you as a pedestrian trying to cross the street.

Education

If you’re traveling as a family, developing countries are even a bigger challenge as they usually offer a poor level of education. This is unless you can afford private international schools, which will be more costly than education in your own country.

Fear of change and lack of ambitions

Low costs locations 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 frustrating to get back to living in developed countries so you might avoid leaving them even if it makes sense on the long term. In addition, the low cost may also give you the illusion that all you need is $1,000 of income to live well, so you lose the drive, and become lazy. Life will then hit you by either making you get back to your country or by increasing costs where you stay (for example, currency fluctuations can go both ways). This risk is dependent solely on your mindset and you mitigate it psychology by setting goals and being aware to the need of your career to constantly moving forward , but easier said than done when rent is $100 a month and lunch is $2.

You are not really going to save all this money as a digital nomad

The first thing to remember is that non locals pay a premium price. You will pay it, and I constantly even though I am on the road since 2010. Firstly, the lack of information creates mistakes, vulnerabilities and loss of opportunities that only locals are exposed too through their network of friends and family and years of knowing their location. We’ve have also discussed the reasons for why staying longer saves money in comparison to staying short term in a place.

An interesting phenomenon should be considered when discussing low cost countries. I’ve noticed that when I’m staying in locations that wildly differ in the cost of living, my monthly expense still stays relatively the same. The real change was in the quality of life and comfort. For example, Expatistan cost index shows that Pasto in 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. In Pasto I take two taxis a day, eat only in restaurants and have a private room. We are driven by instincts, which make us defensive when staying in expensive locations and also push us to splurge in a low-cost country

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, regardless of where you live.