Strategy: Take a Wage Haircut and Move to a cheaper area

Strategy: Take a Wage Haircut and Move to a cheaper area

If you moved to a cheaper area to live and took a haircut on your wage, it might not be as bad as you think. This is can speed up financial independence and reduce stress and give you a better quality life.


Example of a $20,000 wage reduction

After tax income on $100,000 would be $73,883 (2018-19 tax year)

After tax income on $80,000 would be $61,383


So, a $20,000 reduction in gross income means only a $12,500 reduction in real terms

Try working it out yourself at TaxCalc - Calculate your tax. 2018-2019 financial year


But the real benefit may be the savings with home ownership.

An equivalent house costing say $1mil in Sydney v $600,000 in Adelaide (for example)

Repayments on $1mil at 4% pa are

· $4,774 per month for 30 years with Total interest payable $718,695

Repayments on $600k at 4% pa are

· $2,864 per month for 30 years with Total interest payable $431,217


The repayments on the smaller loan mean a cash flow saving of $22,920 per year – which more than makes up for the lower wage income.


Furthermore, if you consider commuting times – you might be saving 1 or 2 hours per day living outside of Sydney.

Living costs may also be generally cheaper. Consumer prices are supposedly about 12.75% higher in Sydney than Adelaide:
Cost of Living Comparison Between Adelaide, Australia And Sydney, Australia


Consider also the quality of life.


Conclusion

It can be worth moving out of an expensive place like Sydney and living elsewhere and this can be the case even if you were to take a substantial haircut on your income.

 

Fine in theory but in the current landscape post-APRA, will someone on a lesser wage qualify for the loan on a cheaper property?

Assuming that your wage will grow at 2.5% pa, the $20,000 haircut will cost a PV of $418K over 30 years in lost wages growth (or closer to $880K if you don't use present value calculations). Not quite as attractive financially as @Terry_w makes out but there are other benefits - Adelaide is quite nice, apparently , lifestyle improvements vs loss of capital gains of other cities (anyone's guess).


The person can employ other strategies eg salary sacrifice to super (approx $15k) and save a similar amount of tax as well as having the money set aside for retirement.

 

Where getting finance is an issue, i can think of 2 strategies
a) sell and substittuion of security with the loan being recycled to the new property

or

b) rent and use the 6 year rule on the Sydney property and squeeze some more tax free capital growth.

or

c) sell and pay cash perhaps

 

I've moved from Sydney to the Gold Coast 3 years ago. The costs of groceries is slightly higher here but car insurance and building insurance is a lot cheaper (about 40% cheaper). Eating out is more costly. But the lifestyle is 100% better though.

 

Well, plugging some numbers into CBA's online borrowing power calculator for single income, single person household with default living expenses, the maximum loan is:
Gross income $80K = $354K
Gross income $100K = $477K

Which suggests you can't afford to buy in either city in this post-APRA world!

 

Move to cheaper city

 

Actually a loan of 350k will totally get the job done in Adelaide.

 

Great thread!

I love the idea of doing this as we're currently living the opposite scenario! Unfortunately for us at this stage it is all about the kids, but certainly something we can revisit in due course.

From an investment perspective it is a great way to maximize your exposure to whatever investment class you like - for many the owner occupier particularly in a city like Sydney is massive drain on serviceability and capital.

The only problem is being able to find the right job in the right area, or setting up a business with which you can effectively work remotely.

 

Where in Sydney did you move from?

 

I wish there was a viable, cheaper prospect in Oz that we could move to....unfortunately haven't found anything better.

 

I thought you lived in Sydney? If so all of the rest of Australia would be cheaper!

 

Great post, I had never considered comparing the post-tax income which makes much more sense than gross.

In my experience (comparing like for like, similar distance to city/beach/desirable areas, property type, etc) Sydney is more like 2.5-3x more expensive than Adelaide.
So a $500k home in Adelaide is more likely to be $1.25 - $1.5m in Sydney.

BTW I guess the counter perspective to the first post is that for many people work isn't just about the income and they may get much higher job satisfaction from the career opportunities in a larger city like Sydney compared with the likes of Adelaide.

 

I moved from Bexley (next to Hurstville).

 

Why leave Sydney?

Why not just move out of your $3m house on the North Shore and into a 475K house in Bidwill ( a suburb near Mt Druitt).

Your commute to work may be a little longer but look at the savings on loan repayments AND you can still regularly visit friends and relatives. Sure, you'll get strange looks when they find out where you live but what the heck.

 

And the best part @datto is your neighbour !!

 

Come on! I'll take good care of the Merc. Wash and polish it every week end. Test the brakes in the Macca's carpark before taking it for a run down the M4......can it really do zero to 100 in 4.2 seconds? lol. Nobody likes false advertising.

 

You've got pretty high expectations of @datto's backyard.

 

There is also loss in Super contributions.

The best place to move is Cocos islands - be a dole bluger and live the dream on government's dime.

 

I need to be on centrelink for 5 years to afford flights to Cocos islands. One way tix are a quadrillion dullars

 

Or downsize and retire.