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Webster’s dictionary defines Arbitrage as:
- The nearly simultaneous purchase and sale of securities or foreign exchange in different markets in order to profit from price discrepancies.
- The purchase of the stock of a takeover target especially with a view to selling it profitably to the raider.
The financial blog community has cleverly adopted this concept and applied it to various factors that an individual can take advantage of to hasten the path to financial independence.
It is not the amount that you earn that matters most. It is what you keep. Click To Tweet
- Geographic Arbitrage:
This type of Arbitrage has the most substantial impact on an individual’s bottom line and income retention. Remember it is not what you earn, but what you keep that ultimately matters.
- This is best exemplified with the differences between living in coastal cities (such as San Francisco) versus choosing to earn a living in a Midwest location.
- Coastal cities have multiple factors that drive up the cost of living, which in turn means more of your income is lost and less is retained to build true wealth.
- Housing:
- San Francisco now boasts a median house price of $1.6 million in the first quarter of 2018.
- A 20% down payment alone will require $320k
- Compare this to Forbes #1 place for housing, Dallas, Texas where the average home price is $233k and one can see there is a significant housing arbitrage that can be exploited.
- San Francisco now boasts a median house price of $1.6 million in the first quarter of 2018.
- State and Local Income Taxes (SALT):
- California is known to have among the highest imposed taxes on its residents and has a progressive tax scale (higher earners pay a greater percentage)
The top marginal income tax rate is 13.3%, the highest in the nation
- The base sales tax rate is 7.25% and total sales tax can range from 7.35-10.25%
- Property tax is approximately 0.75% effective rate (although the percentage is relatively low, remember home valuations are much higher than non-coastal homes and thus the overall tax paid can be substantially higher)
- Compare this to Texas
- 0% state income tax
- The base sales tax rate is 6.25% and total sales tax can reach 8.25%.
- Overall effective property tax is 1.9% (however this is assessed against much lower priced homes than coastal areas and the overall tax paid will be lower)
- California is known to have among the highest imposed taxes on its residents and has a progressive tax scale (higher earners pay a greater percentage)
- Salary Differences
- To exacerbate matters, physicians in these high cost of living areas typically earn LESS than their counterparts in low cost areas.
- Usually this is explained by the greater number of physicians aggregating to these desirable areas increasing supply and thus driving down demand/compensation.
- To exacerbate matters, physicians in these high cost of living areas typically earn LESS than their counterparts in low cost areas.
- Housing:
- Coastal cities have multiple factors that drive up the cost of living, which in turn means more of your income is lost and less is retained to build true wealth.

-Medscape Physician Compensation Report 2018
- Time Arbitrage:
- Because of the magic of compound interest, a significant difference in portfolio values can occur based solely on the difference in when an individual first invests.
Courtesy of Motley Fool (assuming an average 7% rate of return)
- Because of the magic of compound interest, a significant difference in portfolio values can occur based solely on the difference in when an individual first invests.
- Specialization Arbitrage:
- Another significant impact in the ability to create wealth is which specialty you choose (as a physician) or what specialization you have done in any field of work
- Although generalists have a potential 2+ year headstart on specialists due to differences in lengths of residencies, as my “The Specialty Gap” post demonstrated, this time arbitrage was quickly overcome by the sheer magnitude in salary differences.
- Even with a progressive tax code in place, higher earners still are able to overcome the extra training required in residency due to the substantially higher income.
Medscape Physician Compensation Report 2018
-Medscape Physician Compensation Report 2018
- Even with a progressive tax code in place, higher earners still are able to overcome the extra training required in residency due to the substantially higher income.
- Employed vs Self Employed:
- Typically a self employed physician will make more than his or her salaried hospital employed counterpart.

-Medscape Physician Compensation Report 2018
As one can see, there are many paths that lay in front of us, from the choice of what specialty to pursue in med school, to what part of the country one wants to live in, to what type of practice one chooses.
This decision tree can accelerate or retard the path to wealth.
As long as an individual is cognizant of these factors no choice can be truly wrong.
It is all up to the individual on what he or she prioritizes.
Some may find the draw of beaches and warm weather too much or may have strong family ties pulling them there and therefore chose to forgo potential Geographic Arbitrage.
Others may truly have a passion for teaching and take pride in shaping future generations of physicians, etc. and thus gravitate towards academic positions.
For those individuals, the trade-off is worth it and realize they may have to work longer in their career to achieve financial independence that may have come sooner elsewhere.
Others, like me, may have lucked into a specific situation (which will be detailed in an upcoming post) that gave them the benefits of geographic arbitrage even before they even knew what it was.
Superpower Take-home Points;
It is not how much money you earn, but it is how much you keep that matters.
- The use of various types of arbitrage can greatly increase your chances of retaining wealth
- Ultimately it is an individual choice on what factors have the highest priority and whether it is indeed worth the trade-off
Note:
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Coming from a geographer, I can attest that place does indeed matter, more than most people think!
Thanks for stopping by. Yes, it is amazing the savings potential living in a LCOL area (property taxes are less, housing cheaper, even utilities where I live are incredibly low compared to some areas (9 cents/kwh 24/7). It has helped me live way below my means in a house/property much bigger than I could afford if I lived in other areas of the country.
Location, Location, Location! ?
Don’t forget about tax arbitrage. I think most people in the FIRE community are potentially looking forward to “early retiring” on a low “earned income” and therefore paying minimal to no taxes in retirement.
Additionally, tax loss harvesting in a taxable account and deferring taxes can be a form of tax arbitrage. So that we can be taxed later in the capital gains rate instead of our marginal tax rate now.
Some people even talk about things like debt arbitrage (0% balance transfers) and work arbitrage (hiring virtual assistants) too!
Great point DMF. Yes there is definitely a tax arbitrage which those people funding ROTH IRAs are hoping to take advantage of.
Savvy individuals try to employ as many ways to defer taxes as possible (and sometimes avoid it altogether with step up basis (of course that requires them to die but the heirs benefit).
Thanks for adding some insight 🙂
Got to love a good coincidence! I posted today about how our big city is the AntiFI. 3k a month for a apartment that would probably fit inside your geoarbitraged bathroom is the height of absurdity.
We are spending a tremendous amount of money for the luxary of living in a beautiful and fun city neighborhood.
Thatbeing said, iI look forward to one day leaving for some trees and grass!
Thanks for stopping by. Yeah I was like wow when I saw your monthly rent amount. You do pay a premium for some locations but if it hits what is important to you then you can’t be faulted.
So much great information here. I’m definitely pinning this one to Pinterest for later.
Thank you so much Andrea especially with the pinterest exposure. I’ve been trying to concentrate that platform. It’s actually been fun creating the pinterest designs. Have no clue what to do with them besides putting them on my own board though. Lol
The information you described in the above article is pretty good. I think you should write more on this and related topics as well so that I can send more users on your article. It helps me a lot.
Thanks
This was an interesting one, X.
We deeeeeeply feel that point about location. We make a lot of sacrifices to be in Charleston (well, a lot of money!) but it’s worth the cost to us for the high quality of life, proximity to family and sunshine ?
It’s really about personal choice. Some benefits (location to family, etc) are with the added cost. I agree weather would have me choose someplace more expensive over a colder cheaper area any day (luckily I have good weather and low cost where I ended up)
I did insurance arbitrage. When I got out of the Navy I traveled as a locum in the state I wanted to live in. I looked at the population, medicare, medicaid, indemnified, employers, economic expansion. I chose to live in a small town connected to a really big space port that had the second highest indemnified insurance % in the state. Property was dirt cheap (but I didn’t buy a Dr house) and no state taxes, and low property taxes. I live 40 miles from a world class destination (aka airport). I home schooled so I could care less about… Read more »
I think that is a great way to really know how a medical practice works and the location by doing a temp/locum job. Looks like you chose wisely. I know people say it is worth it to pay the “sunshine tax” that comes with living in the coastal states, but I think I’m happy to have a home base in a cheaper area and travel when the mood hits (I too live near an international Airport which helps)
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I’m glad you enjoyed the writing. Thanks
I wept as I read you using CA as a bogeyman on how not to make smart decisions. We might be locating to the state when my wife finishes residency and would essentially have us reverse geosrbitrage. But making a large sum of money there and retiring elsewhere could be in the cards for us.
Regardless, good write up and I appreciate the salient points you raise about cost of living differences, physician specialties, self-employment vs. employment, and compounding returns. Thanks for sharing.
Yeah I’m afraid California is the scapegoat for anyone using geoarbitrage examples. Because of the progressive tax system you get nailed with pretty impressive tax bills when you are a high earner (and with the new tax laws eliminating as much deductions it stings more). Of course the plusses of living there are also important like food, sunshine, and beaches. As long as you are happy where you are you can be ok with the loss of that geoarbitrage (but it requires sacrifices elsewhere if you want to keep pace with someone in a LCOL area)
Nothing about FI from me, but your post made me think of the arbitrage desk at Nomura – my first job on Wall Street. The arb desk was something new in the early 1990’s. Not every firm had one, and those of us on the mortgage desk only found out what it really was when they started carting in all these fancy computers (Sun and NeXT workstations). That made us jealous first. Then we heard about the size of the trades they were putting on – like billion$ at a time. It really was the wild west of Wall Street… Read more »
Wow, never heard of an arbitrage desk. Interesting concept. Thanks for the insight 🙂