Living in a high-cost region like the San Francisco Bay Area or Silicon Valley presents unique financial challenges. However, with the right strategies and mindset, you can find financial freedom, build wealth, and experience security. Of course, with higher costs of living, your overall financial approach to achieving wealth will differ. Here are 11 tips to help you navigate higher costs of living, higher income, and your goals of financial freedom.
Begin with the End in Mind
When you use a navigation app to travel somewhere new, two things matter: your current location and your destination. Your financial journey is the same. First, you need to understand your current financial situation. This includes your current cost of living (rent, groceries, commute, utilities, etc.) and income. Second, you need to know where you want to go (what kind of home you want to live in, what you expect your lifestyle to be, etc.).
Of course, when you live in a high-cost area, you are likely to have unique lifestyle expectations. You have more access to great food, art and theater, travel hubs, and overall experiences. You may also want to own a home, which can be prohibitive in some areas.
That’s why it’s critical that you evaluate what’s truly important to you. In a place with so many opportunities, it’s easy to feel frustrated when your income doesn’t cover everything. Rather than cursing your budget because you feel you “have” to own a home in The Valley or because you “have” to go out to dinner every night, think through what matters to you.
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- Do you want to own a home?
- Do you enjoy eating out every night?
- Do you want to attend more events in your city?
- Do you want to own a car?
- Do you want to travel a lot?
- Do you want children?
There are so many questions that we rarely ask ourselves, and instead just do by default. It’s time to evaluate your values so that you can decide where you want to spend your money — and where you’d rather save it
Unsure what your values are as they relate to your financial future?
Use our free values exercise to uncover what matters most to you!
Understand Your Finances
Once you identify your values and priorities, it’s time to understand your current financial situation: what money is coming in, what money is going out, and what money is left over.
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- Understand your paycheck: What is your net take-home pay, meaning what do you bring home after taxes and various deductions? This is the money you have left over to spend and save.
- Know how much money you need every month.
- Review your bank statements and credit card statements.
- What are your nonnegotiable expenses every month, such as mortgage, utilities, groceries, etc.?
- What are your discretionary expenses every month?
- Determine how much cash you have left over each month.
With what’s left over each month, you can determine whether you’d prefer to save for a single event (e.g., going on a long vacation or buying a home), invest, or spend differently in one or more categories.
Need help tracking all of these details and deciding where you want to spend (or not spend) your money? Use our free budgeting template here!
Protect Your Finances
Knowing your goals, your income, and your expenses are the cornerstones of a great plan. However, as we all know, life happens. When you live in a highly populated city with specialized industries, a lot can happen in a very short time. From sweeping layoffs to pandemic restrictions, gas shortages, and rental cost spikes, even the best-planned budgets can be affected.
To protect your progress against any unforeseen circumstances, you need to have “defense strategies” in mind.
Two main benefits of having robust ‘defense’ strategies while living in a high-cost city are:
- Comfort and security. Using these defense strategies prevents you from incurring unwanted debt while navigating the situation at hand.
- The luxury of time. When you encounter a major event, such as job loss or illness, these defense strategies allow you the time you need to evaluate the next best opportunity. You don’t have to jump into the first job offer or worry about work while ill.
Financial Defense Strategy #1: Cash reserve
The first financial defense strategy you need is an extra cash reserve. This is the money you will set aside for some inconvenience, such as a broken phone screen, getting flat tires, unexpected dental work, etc. Remember: inconveniences often cost more in larger cities, so plan for a larger cash reserve than you’d plan for in a smaller town (or even pre-COVID).
You want to keep this fund readily available and accessible; a great option is to keep it in a high-yield savings account at your local bank.
Are you relocating to a high-cost city and are unsure what changes you should make to your budget? Download our FREE guide below!
Financial Defense Strategy #2: Emergency fund
Second, have an emergency fund to cover 3 to 6 months of current living expenses. Depending on your comfort level and other life priorities, you may consider increasing this fund up to 9-12 months of living expenses. This type of emergency fund is particularly important if one of your aspirations is to go on a sabbatical, launch your own company one day, or even start a family.
You also want to keep this fund readily available and reasonably accessible. You probably don’t need to access them right away, but you want to keep this fund liquid, meaning you can easily access it when you need it. Keeping some portion of this fund in a high-yield savings account or short-term CD will be a great option to consider.
Financial Defense Strategy #3: Insurance
Third, get adequate insurance coverage. When you live in a high-cost area, you’ll often pay more for auto, renters, or homeowners’ policies. While that can add up, it’s important to choose a plan that fits your needs, rather than going for the cheapest option. Future you will thank you, should something happen.
You also want to consider long-term disability insurance and life insurance. Long-term disability insurance provides financial support by replacing a portion of your income if you become unable to work due to a serious illness or injury for an extended period of time. Obtaining this coverage through your workplace, professional affiliations, or alma mater is typically the most cost-efficient option.
Life insurance may play a big role in supporting loved ones and dependents in a high cost of living city. Work with a financial planner to ensure your coverage is sufficient.
Minimize Debt
Having significant debt, in general, will slow you down from saving and investing for the future. Having significant debt in a high cost of living city can be even more prohibitive. Having a high debt-to-income ratio can affect your rent, access to homeownership, and more.
If you don’t have to pay debt payments, that money can be reallocated toward other important goals, such as home ownership, traveling, retiring early, or building wealth.
A note on student loans: In larger cities and in specialized industries, you may have employment benefits that help you pay your loans.
Automate Savings
Many employers allow their employees to split their paychecks at no additional cost to them. Consider splitting your paycheck to automate your savings. This can make it easier to consistently save toward your important life and financial goals. If you find that you tend to spend any additional money, this is a great “sneaky” option to prevent that!
Leverage Your Retirement Accounts
Your 401(k) is one of the most underrated paths to future financial freedom in expensive cities. To make the most of yours, it’s often best to contribute up to the percentage that your employer matches. That’s free money to you! You might also consider contributing up to the maximum annual contribution limit. If your employer offers a “Mega Backdoor Roth” option and you have room in your budget to save more, consider contributing to it.
Lastly, if you’re just starting your career and a Roth 401(k) is offered by your employer, consider contributing toward a Roth 401(k) and take advantage of paying taxes upfront while you’re in a lower tax bracket.
Work with a Certified Financial Planner®
When it comes to building wealth and securing your financial future, the best approach is to have a plan that takes into account all the nuances of your situation. That’s why it’s often best to work with a financial advisor or, more specifically, a Certified Financial Planner®.
Certified Financial Planner® professionals offer:
Tailormade Financial Planning: There is no one-size-fits-all financial planning. Your CFP® professional will help you create a roadmap that will take you to your financial destination. It will be based on YOUR values and priorities, considering all aspects of financial life.
Accountability and Thought Partnership: Regular meetings with your CFP® provide accountability and help you stay on track with your financial decisions.
Delegation: Let’s face it. You’re busy and have other important responsibilities. You do what you do well and have your CFP® help you achieve your important life and financial goals.
Ready to work with a team of Certified Financial Planner® professionals who understand your needs, challenges, and goals? Contact Guiding Wealth today — we’ll walk you through our services and how we can best support you!
Celebrate Your Wins
Make sure to take the time to celebrate your wins. Celebrating your wins will increase your momentum and prevent burnout. You will actually enjoy your financial journey to your ultimate financial independence. We can’t wait to celebrate your wins with you, should you choose to work with us to build wealth and carve out your own version of financial freedom.
EUNSOO CHUNG, CPA/PFS, CFP®, AFC®
Eunsoo believes that financial freedom can be anyone’s superpower. Her passion is to empower clients to make smart money decisions, so they achieve their financial goals and stop feeling stressed about their money situations. She regularly volunteers her time as a financial coach at the Bay Area Cancer Connections and Financial Peace University.
Want to work with Eunsoo or another trusted Certified Financial Planner® on the Guiding Wealth team? Schedule a free, no-pressure consultation below!