I’d like to explain what it is, why it can be a key tool in finding financial freedom and why I find the concept so interesting.
Basically, Geo-Arbitrage is awesome.
Like a lot of awesome things, it is stupidly simple and boils down to nothing but good old common sense.
First of all, let’s look at arbitrage.
Let’s use wikipedia. I quote:
“In economics and finance, arbitrage (US: /???rb?tr???/, UK: /???b?tr?d?/, UK: /???b??tr???/) is the practice of taking advantage of a price difference between two or more markets: striking a combination of matching deals that capitalize upon the imbalance, the profit being the difference between the market prices. When used by academics, an arbitrage is a (imagined, hypothetical, thought experiment) transaction that involves no negative cash flow at any probabilistic or temporal state and a positive cash flow in at least one state; in simple terms, it is the possibility of a risk-free profit after transaction costs. For instance, an arbitrage is present when there is the opportunity to instantaneously buy low and sell high.”
Did you get this bit:
Free money! Woohoo.
But nobody said that arbitrage was simple. FX Traders are looking for arbitrage opportuniies all of the time as part of their jobs, but being a good FX trader isn’t easy.
Arbitrage exists in sports betting too – e.g. if you get different odds on a player winning a match between two different bookies – obviously you can profit from that difference simply by placing a bet with both bookies.
So why isn’t everyone doing it?
… because it’s not easy to find those different odds in mainstream matches (though there are people who do) – it takes a lot of time and effort and is also a moving target (odds change all the time and of course as soon as the bookies realise they have a gap, then they close it).
Anyway, that’s arbitrage – basically making money due to a difference in two or more prices, deals or markets.
It involes a buy and a sell transaction so that a profit is made.
It’s not the same as finding the best deal as that is only a one way (purchase) transaction.
So What is Geo-Arbitrage?
Basically Geo-Arbitrage is the above where the factor which determines the difference in prices, deals or markets is geography.
A Quick Example…
Let’s say you are a software developer working for a company in London. It doesn’t have to be a big company, just a small software house let’s say. They don’t even have to pay you well, let’s say they pay you a little below the London average for your particular job and skillset.
If you were living in London, then you’d probably get by OK seeing as a software developer isn’t a bad job pay-wise, you wouldn’t be rich by any means but hardly scraping the bottom of the butter. You may be a little unhappy if you’re aware your pay is a little below average and you might feel like you’re struggling but you’d be OK.
Let’s now say that your small sofware company employs flexible working practices. You can work from home 100% of the time. In fact you can work from anywhere. All calls, meetings and communications in your company are handled remotely via telephone or video conferencing.
So you go home and work from home – your tiny (rented) one bed studio apartment in Shoreditch. Still OK – even better you have saved the cost of the tube journey into work every day.
Then it occurs to you, you can work from anywhere. So you move to Thailand and work from there. Suddenly your less than average London salary makes you rich. Your cost of living has just diminished significantly, you have a huge apartment overlooking a beach for the fraction of the cost you paid for your tiny one bed studio in Shoreditch and you can afford a pretty luxurious lifestyle, not to mention enjoying the lovely weather.
Geo-Arbitrage is Not For Everyone
Obviously not everyone can afford to just up and move to Thailand.
You may not have a job which allows you to work from anywhere. You may have family ties. Or any number of reasons you just couldn’t make such a huge shift in your life.
Well, it doesn’t have to be a huge shift.
Like a lot of things, geo-arbitrage is just a concept, an idea, and as such it can be applied in different degrees.
As long as it’s arbitrage (see above – making some money (or savings) from he difference in two prices and as long as it has an element of geography in it, then it’s geo-arbitrage. You can do it by earning in an affluent area and moving to a less affluent area – in or around the same city!
We have our own little version of geo-arbitrage which definitely affects our lifestyle and monthly income in a big way.
We didn’t quite move to Thailand as in the above example, but we did move to Derbyshire.
I keep in touch with the London market (property-wise and also the consulting market) and we have some on-going income coming out of London as well as the possibility of consulting work (due to keeping in touch with London and still having somewhere I can stay there). As we live in Derbyshire where the cost of living is significantly less than in London, a portion of our income definitely has a very strong element of geo-arbitrage to it.
We’re mainly happy in Derbyshire because our children are happy here (we only originally intended to stay for a year which is why we wrote a book about what we thought was a 1 year, one-off experience – To The Country We Go – but when we got to the end of that year, originally then planning to move to France, there was no reason to leave at that precise moment and as we liked it we stayed longer, the children were doing well at school and wanted to stay and that takes us to here, 7 years later).
When our children have left home in a few years we may well take our geo-arbitrage a step further and do some travelling.