Does Big City Living Provide a Higher Return on Investment?

in Financial Planning by

Choosing where to pursue the American Dream has become almost as controversial as choosing a college major. Increasingly the rising cost of living has instigated a shift from prioritizing personal preference to return on investment when considering varying locales. While big city living has long attracted young professionals looking for access to the best opportunities in kickstarting their careers, cost of living considerations have made those expensive city living choices a little more difficult.

Many criticize today’s Millennials for settling in pricey living locales while carrying record debt loads. However, just as a college education provides a better return on investment than a high school degree, the higher costs of urban life may also deliver more bang for your buck.

Arizona State University’s Jose Lobo used data from the U.S. Bureau of Economic Analysis (BEA) to study where Americans actually made the most money when differing costs of living were taken into account – a metric he labeled “real average wage per job”. The metro with the highest real average wages per capita was Silicon Valley’s San Jose, with a real average wage topping $75k. NYC suburban metro Bridgeport-Stamford, Connecticut came in second with a real average wage per capita of $64,321. Coming in third was the San Francisco-Oakland-Hayward metro at an average $60,562 per capita.

Despite the high cost of living in these areas, Lobo found that knowledge hubs and energy centers still dominated the list of desirable locations thanks to considerably higher wages. On the flip side, the smaller and more isolated a metro region, the less bang for your buck you enjoyed. The only real exceptions were energy metros like Midland and Odessa, Texas where the natural gas boom rapidly increased wages while cost of living remained relatively low.


So how do infamously sky-high housing costs and taxes in cities like San Francisco and New York come into play? Lobo’s analysis of “real average wage” finds that higher incomes in these expensive coastal metros more than compensate for the additional expense.

For example, a double than average salary likely comes in pricey metro area with a double than average rent – making it a wash. However, other living expenses like food, healthcare costs, etc. while more expensive, will not be quite double-making the higher city salary the more favorable choice. In other words, if a metro’s income is double the average, only a few living costs will be inflated as much, making city living a better value.

Of course, that double than average city salary is not a guarantee. The high “real wage” averages in these top metro areas are inflated by high concentrations of highly educated, knowledge workers whose wage gains are more than sufficient to offset higher living costs. It is lower-paid workers whose wages are not enough to keep up who bear the brunt of expensive city living.

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A 2013 study by University of Pennsylvania’s Jessie Handbury found that high-income city residents also get access to the best deals. In researching Nielsen shopping data for 40,000 American households across more than 500 food categories, she found that households earning above $100,000, have grocery costs 20 percent lower in cities with high per-capita income (like New York) than in cities with a low per-capita income (like New Orleans). On the flip side, a household earning $15,000 per year faces approximately 20 percent higher grocery costs in cities with relatively high per-capita income. Additionally, federal programs intended to help the poor like food stamps and child-care subsidies are generally not adjusted for local cost of living, disqualifying many of the poor in high cost cities like New York who are paid $10 an hour rather than $7.50 an hour, artificially putting them above the poverty line.

So while big city living clearly favors the wealthy and puts undue burden on the poor, what about those in between? What about all those hopeful young professionals moving to these concentrated areas of opportunity, saddling themselves with high living costs on top of their uncertain employment prospects and student loan debts?

For young singles with no familial obligations, it’s a risk that could be worth taking. The cost of increased access to higher salary positions, chances to move up the career ladder, and opportunities to beef up the resume, can be offset easily for those willing to make temporary lifestyle tradeoffs, reducing necessary costs of living- sharing space with roommates, using public transit, or eating on the cheap.

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It’s not just the opportunity for increased income that makes these trade-offs worthwhile either. It’s access to the greater resources available in these high priced cities along with other personal considerations- culture, network, diversity, and lifestyle.

While financial realities should certainly be a factor in deciding the ideal destination for pursuit of the American Dream, return on investment goes beyond numbers. Yes, big city living is a financial risk that can come with big benefits or major stressors, but the ultimate measure of ROI will be overall satisfaction. While income and financial stressors certainly affect that satisfaction, dismissing all the other factors might set you up for a life and locale that doesn’t necessarily reflect your core values, priorities, and ultimate happiness.

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Stefanie O'Connell

Stefanie O'Connell

Stefanie O’Connell is a financial expert, Gen Y advocate, speaker and author of the book, “The Broke and Beautiful Life.” She blogs about millennial finance at @stefanieoconnel


  1. David

    The problem with this is it’s not really an apples-to-apples comparison. Sure, you can make higher income in these expensive cities, but your life has to revolve around your work for many years to get that ROI. There is a lot of competition in the cities, and high requirements for education. You also spend significantly more time in rush hour traffic. Also, this article severely underestimates the effects of taxes and the differences in housing prices. Rent may be only double in places like the Bay Area, but to buy a house is currently highly inflated and will often take years for a highly paid engineer to even be able to consider a very long-term mortgage, after which they will be a slave to the system until it’s paid off. Also, higher income means higher tax brackets, meaning every additional dollar you make doesn’t go quite as far as the last. Saving a dollar is much more efficient and requires substantially less work than making an extra dollar at 30+% combined tax rate between state and federal. There are currently nice, growing cities throughout the country with beautiful suburbs and large home plots as well as houses very close to downtown for 1/6 of the price of the cheapest, dingiest condo you can find in some crowded areas of the Bay. The difference is staggering. The best way to maximize your ROI in my opinion, accounting for everything from financial stability and independence to amount of work, would be to earn very high income in one of the major cities for a decade or so, save and invest every dollar possible, and then move somewhere cheaper and buy a small starter home with cash up-front in order to raise a family. In some cases, those large urban employers will let you work remotely as well and keep your salary. But regardless, the power of saving and investing with compound returns will create a stable financial footing for years to come in a cheaper place.

    • Anonymous

      Very well stated. I concur with your recommendation too.

    • James R

      I feel a lot is overlooked in this article. As you said, traffic is a huge factor. I drive 15 minutes to work. The cost of time and money of having an 1 hour+ commute is often overlooked. I also feel it is too bold to make a blanket statement saying that the ROI in big cities exceeds small metros. Housing bubbles, crime rate, local legislation, housing market turnover, job market, etc are all factors that need to assessed for each major city. Some young and booming metro areas like KC, Dallas, Omaha, Oklahoma City, are all cities on the rise. While the salaries aren’t double the national average, the future growth of housing markets and job openings makes theses cities great competition to major coastal metros.

      • Greg Mackey

        Agreed, I live in the OKC metro and my 10-mile commute takes about 20 minutes. Building a financial cushion that can last through most of life’s challenges is not an issue here for those with a college education (if they are financially responsible and choose to do so). Jobs are also in plentiful supply for qualified individuals. Housing bubbles have very little influence in this region and home prices remain relatively stable. I love it here and can’t imagine anything that would compel me to move to an area with a high cost of living, but I can definitely see those areas appealing to others with different priorities.

  2. Barry Allen

    How exactly do higher income earners have lower grocery bills than lower income earners? Some clarification is needed.

    • Jake

      Yeah…totally lost me on that one.

    • Greg Mackey

      Yes, clarification would be nice. Most people I know with larger salaries tend to shop at very expensive grocery stores, so their costs are far higher than those I know who make considerably less money. I’m one of the exceptions to that rule, since I do my grocery shopping at a warehouse club and pay significantly less than even those who shop at discount grocery stores. I know my case is not the norm, though.

      • TLV

        My interpretation was that high-earners will buy groceries at high-end places in either location, but that high-end groceries are more expensive in low-income cities than in high-income cities (perhaps because they have a smaller customer base), while low-end groceries are more expensive in high-income cities than in low-income cities.

    • Anonymous

      I think because they eat out more often. When you make a higher salary you can afford to eat out which results in a lower grocery bill. That wasn’t mentioned. Likely the higher salary people ended up spending a lot more between the groceries and the restaurants.

  3. Travis Van

    Interesting take. But the other major omission here is cost of children in metros. Have two kids in San Francisco, and that’s where you really start feeling the rub of cost of living. That is an enormous variable in your rural v. metro calculation.

  4. Paul

    I agree with most all of the points David made. In addition, there are other hidden costs to living in large metro areas, such as quality of life. Things like noise levels, air quality, relationship with your neighbors, a sense of community, land ownership, access to nature, and so on. Your paycheck is not the only thing that provides you with a quality of life. My wife works for a sizeable investing firm that chose not to base themselves in NYC but rather to an inconspicuous suburban area well on the outskirts of a medium-sized metro area far away from NYC. My wife and I used to live within that medium-sized metro area, then we decided to relocate to a rural suburb like her company did, and we have never been happier! I can’t imagine ever going back to living in a metro area again.

  5. Christophe

    Thanks for the article. The idea that one can generate more money in a high cost of living city seems interesting. I would argue further that in some geographic areas (some with higher cost of living) one might find more motivation in trying to make more money. Motivation is probably the number #1 factor in building wealth. In some areas making lots of money is nearly taboo, something to be ashamed off.

    This topic is actually something I am personally experiencing. After 2 years in a small village in south France where I could have probably have lived forever without working again. I decided to relocate to Miami Beach (high cost of living) to find inspiration. Now Miami is a unique animal (this is not the “classic” US) so I am still trying to understand this area and it’s potential opportunities between 2 mojitos. 😉

  6. Joel

    Lots of assumptions in the article and data I disagree with. Earning a combined household income of $100k+ and living in the Bay area, with rental rates at $3.00 – $5.00 psf/mo (that’s PER SQ FEET / MONTH = a 700 SF apartment will cost you between $2,100 – $3,500 / mo. Consider that a mortgage on a home banks into (based on 4/2015 rates) approx $500/mo for every $100k financed, your tiny 500 sf studio apartment at $1,500 – $2,500/mo will translate into financing $300,000 – $500,000 on a mortgage. This is just your MORTGAGE which is between 96.5% (if you go SBA) to 20%+ of the home VALUE. Let’s assume for sake of ease, you can get a 100% loan. My tiny studio/1-bedroom in the example above will afford me a home/mtg for around $400k (average of $300k – $500k: see ex above). That won’t buy me a GARAGE in the bay area. What will that buy you in other nice areas: Atlanta, Carmel, Dallas, North Carolina, Cleveland, Boulder, Denver, etc…

    Now cut my salary in half, and I can afford a $200k home. Don’t get me started on taxes. The article stating ROI is worth it in a big city is bologna (thank you oscar meyer theme song for helping me remember the spelling).


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