What is Living in San Francisco Actually Costing You?

Yesterday, a friend reached out to me asking if they should relocate from San Francisco to another state within the U.S. for tax purposes.

They recently saw their income balloon while working entirely remote, and were wondering if staying in the city is worth the $50,000 a year they’re currently paying in state taxes.

I’ve personally been considering this idea for some time now. While I don’t think moving to another state is the right answer, I do believe I’ve found something far more interesting.

A way to have the best of both worlds, and I’m not the only one looking to take this leap.

Should You Move to Mexico?

But more specifically, Mexico City.

In a previous article, I outlined how I spent much of 2018 and 2019 interviewing remote entrepreneurs. These were people who decided to leave their home country and travel, while simultaneously building a business.

The underlying principals are wildly popular in the Nomad community: reduce expenses, reduce tax liability, and take advantage of currency arbitrage.

Simply put, make money in Dollars, spend money in Pesos.

I’ve been mulling this over for some time now—but it was finally made concrete— when my father and brother both moved to Mexico two years ago. Needless to say, I’ve spent plenty of time there since.

Despite what you may have heard in the news, Mexico City is world-class.

I count myself lucky enough to have spent considerable time in some of the greatest cities on Earth: Paris, Madrid, Athens, Rome, New York, San Francisco, Bangkok.

I promise you that Mexico City is right there with any of them. As a foodie, it also doesn’t hurt that five of the Top 100 Restaurants in the world are in Mexico City.

So I wanted to understand if it’s really worth uprooting my life in the United States to move to Mexico City. Here are some of my considerations:

A final thought: I’m currently located in San Francisco, but have a residence in Florida. I’m making a San Francisco wage in an entirely remote position.

Okay, let’s get into the numbers.

Cost of Living

If you’ve never been to San Francisco or Mexico City, make sure you’re sitting down. This is going to be a bit shocking.

The cost of living including rent, food, utilities, transportation, gym membership etc. in San Francisco for an individual is about $4,450 per month.

In a ranking done by Mercer in 2022, San Francisco was found to be more expensive than 92% of all other cities worldwide. Nerdwallet has it ranked as the #3 most expensive city in the world.

Now for all those same things in Mexico City: A beautiful apartment in the city center, a month’s worth of food and restaurants, gym and transportation come to about $1,190 per month.

Apples to apples on cost of living, the difference is $3,260 per month, or just about $40,000 per year.

These numbers are averages—taken from crowdsourced self-reported data—but based on my experience in both cities, they track remarkably close to actual costs.

Determining your particular cost of living depends entirely on your lifestyle. In that case, it’s more useful to think in percentages than absolutes. So regardless of your lifestyle, expect to pay about 75% less to enjoy the same in Mexico City.

Taxes

California has a state tax that varies broadly depending on your income level.

If you make $60,000 per year, you can expect to pay 3.67% of that to the state.

If you make $125,000 per year, you will pay 9.3% tax to California.

In Mexico, a U.S. citizen who is a non-resident will be paying 0% state income tax.

You can also take advantage of something called the Foreign Earned Income Exclusion (FEIE). This reduces your taxable income by $112,000 per year. Meaning if you make $120,000 in wages while living outside of the United States, you will only have to pay tax on $8,000 of it.

I’m not a tax professional and this is a nuanced process, but I have family and friends who have made use of this tax credit. It’s very real and very accessible.

Breaking Down Your Salary

So, what does it look like to live in each city?

I took a few different income levels, and compared their power in both San Francisco and Mexico City. One important assumption made here is that, if you live in Mexico, you have to make your permanent U.S. residence Florida, or some other state with 0% income tax.

That would be my plan, considering I already have a residence there.

Here’s how things shake out living in San Francisco vs. Mexico City at four different annual income levels: $350,000, $225,000, $125,000, and $60,000.

The yellow bar is your disposable income. After paying for nights out with friends, dinners, gym memberships, shopping trips, rent, utilities, and groceries.

The yellow bar is everything you get to actually keep.

Now, there are few things that immediately jump out at me. The first is that, your Net Income is 75% or greater in Mexico, regardless of income bracket.

That means you get to actually keep the vast majority of your money.

The second is that, you literally can’t survive in San Francisco on a $60,000 per year salary. Full stop. I originally thought this was a typo but, living alone in San Francisco on that salary is impossible. You’d be $6,400 in debt after one year.

Opportunity Cost

Opportunity cost is a bit like paying cover at a bar. While there may be a perfectly fine, and free, alternative down the street, this bar has more people, or live music, or they’re charging cover simply because they can.

In this case, San Francisco is a super premium cocktail lounge.

Let’s see how much cover is.

This is that same chart from above, but now I just highlighted the difference in green between Mexico and San Francisco at each income level.

As a $125,000 earner, the cover charge to live in San Francisco is $76,000 per year, or $6,300 per month. That’s a pretty serious entrance fee.

Additionally, if you lived in Mexico City on a $60,000 per year salary, you’d have $45,000 in savings at the end of the year.

If you lived in San Francisco at that same income level, you’d be homeless, or more likely moved back in with your parents.

It’s Not a Permanent Decision

In the past decade, I’ve moved to three different states and spent nearly two years traveling overseas.

In that time, I’ve changed a lot: my preferences, my investment approach, my income and network. They’ve all evolved over the past decade. So I can say, with some certainty, they will continue to change in the future.

Therefore, it only makes sense to plan for a short term move, probably on par with what I’ve done in the past. On average, I’ve spent about four years in each location I’ve lived.

So let’s expand the previous chart out to four years. This is the opportunity cost of staying, versus leaving, on a longer time horizon.

The numbers above each bar are how much more you’d have in savings over the course of four years.

• At $350K that’s 69% more saved by living in Mexico

• At $250K that’s 98% more saved by living in Mexico

• At $125K that’s 238% more saved by living in Mexico

• At $60K that’s infinitely more, because you would have $0 in SF

Each one of these red bars is the cover charge for hanging out in San Francisco. A bit steep if you ask me.

Your Investments Can’t Touch This

When we talk about stock market returns, we’re talking about 6-7% per year. If you’re the best investor in the world, you can possibly squeeze out 20% growth year over year.

Aside from winning the lottery or having your company IPO, this one decision—moving to Mexico—will outperform just about any conceivable investment you could make.

But it gets even weirder from here.

Before we move on, there are two interesting things to note.

The first is that, as a $350K earner in Mexico City, you’ll be a millionaire within four years.

The second is that in the $125K bracket, you’ve more than tripled the amount of money you have in the bank by leaving San Francisco.

By extending this timeline out to four years, something a bit strange is beginning to emerge. Did you catch it?

I almost didn’t.

Who Wants to be a Millionaire

One final graph. I hope this one drives it home for you. It certainly did for me.

This is the amount of time, in years, that it would take for you to have $1,000,000 saved in your bank account.

How many years until seven-figures?

This was striking to me.

Let’s review what’s going on here:

• $350K earner: San Francisco 6 years / Mexico 4 years.

• $250K earner: San Francisco 11 years / Mexico 5 years.

• $125K earner: San Francisco 30 years / Mexico 9 years.

That’s it, right there!

Who Does This Really Help?

What this chart reveals is that the move actually isn’t all that advantageous for super-high earners. Above a certain income level, you’re going to be saving vast amounts of money either way.

I mean really, what’s the difference between becoming a millionaire at 36 vs 34?

But for people in the middle range, moving can have life changing benefits.

Let’s not forget, $125,000 per year is nothing to balk at. This is a top 2% worldwide income, but in San Francisco, it’s peanuts. It’s the kind of wage that, after 30 years in a cubical, you’d retire with $1,000,000 in the bank.

That same income, 2,200 miles away, would make you a millionaire before your 40th birthday. Throw that in a retirement fund, and you’d never have to save another cent in your life.

And we haven’t even talked about the most counterintuitive part of this chart yet.

A $60,000 earner in Mexico City would have saved $1,000,000 almost a decade before someone making double their salary in San Francisco.

At these income levels, it’s no brainer. You can get your salary cut in half, and still be better off by moving.

When it’s Not Worth Moving

Now that we’ve calculated our opportunity costs in a few different ways, we can see that the move is really only advantageous for some people.

But that’s not the whole story.

You have to weigh the monetary opportunity cost, against the intangible career development opportunities, and networking opportunities San Francisco is known for. After all, there’s a reason so many people have historically relocated to the Bay Area.

Ultimately, you have to make a prediction:

• Will staying allow you to seriously level up your salary?

• Can you move from $125,000 to $250,000 in a few years?

• Would that same opportunity not be available to you if you moved to Mexico City?

There is no clear answer to these questions, but that is where the decision lies.

You have weigh the odds of some San Francisco magic happening versus the certainty of greater savings by moving to Mexico City.

Don’t Move For The Money

Money for money’s sake is meaningless and I’ve seen it drive people to the brink of mental collapse.

So you need to determine why. What’s the point of moving? What’s the point of rapidly growing your savings?

For me, it’s to reduce all the mental chatter around being financial vulnerable.

A fluffy saving account grants you one beautiful thing: optionality.

Optionality means:

• Not taking high paying jobs that don’t align with your values.

• Not needing to climb the career ladder, at the expense of relationships.

• Not seeking higher and higher wages, just to keep up.

• Not worrying about layoffs during a market downturn.

• Taking a few years off to travel.

• Locking in a retirement safety net early in life.

• Taking your foot off the gas, and still feeling secure.

Optionality allows you to spend more of your life with family, building close friendships, seeing the world, and doing the things you love. Optionality, ultimately, means that more of the world and the experiences it has to offer are open to you.

When 70% of your income is used just to pay the bills, can you really afford to stop? Can you afford to take a break, even a little one?

Conclusion

I find myself squarely in the middle zone—where moving would be wildly advantageous.

My odds of climbing to the $250,000 - $350,000 annual income bracket within the next few years highly unlikely. I’d put my odds slightly above getting struck by lightning and below winning the lottery. That’s to say, nothing I’m going to bank on.

Therefore, moving to a beautiful city—that I know I like—and saving an additional $300,000 over the next four years, makes a lot of sense to me. Don’t get me wrong— San Francisco is incredible. It’s truly the best place I’ve ever lived, but is it worth the $75,000 per year entrance fee?

Of course, there are other intangible factors like the quality of a community and how beautiful a place is. But the very first step in this decision making process is quantifying what can be quantified: cost of living, taxes, opportunity cost, and net income. Only after, should we begin to bring intangibles into the equation.

There are a lot of assumptions in this article, many of which are specific to my life, but that shouldn’t detract from the broader point. When you decouple where you live from where you make money, a whole world of possibilities opens up to you.

—Zac

You made it to the end!

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