I'm a CFP® who specializes in message-based financial guidance for Millennials just like you. And it's only $95.
On this episode of Financially Well, the finance podcast for Millennials, I want to discuss how Millennials might want to think about the cost of living in Washington, DC and other expensive cities. The price of housing and daycare in DC is among the highest in the country. But that doesn’t mean you can’t — or shouldn’t — cultivate financial wellness here.
Washington, DC, is an expensive city to live in. According to the Council for Community and Economic Research, Washington, DC is the fifth-most expensive city in the country. Only Manhattan, San Francisco, Honolulu, and Brooklyn will cost you more money.
When you’re a recent college graduate, this stat may not alter the life decisions you wish to make. Young adults who live in these cities quickly learn how to reduce costs to a bare minimum. Shared housing arrangements and happy hour discounts are critical financial planning strategies almost by default.
But at some point, your preferences may change. You may decide that you’d like to begin using your money in different ways. Or, despite your best efforts, you may develop a nagging feeling that you “should” start living up to some more “responsible” adult standard. A voice in your head might start saying, for example, “Why aren’t you contributing more to your company retirement plan? You should be contributing more to your retirement plan.”
No matter what prompts you, though, you may quickly find yourself wondering how you can afford to live in Washington, DC. And whether it’s worth it to you to stay in Washington, DC at all.
What salary do you need to live in DC? To try to answer this question, you may be inclined to turn to an online cost of living calculator. Keep in mind, though, that even the best cost of living calculator doesn’t provide a solution to this dilemma. No cost of living calculator, using generalized estimates, can tell you where you might enjoy living based on your income and likely expenses. But when you’re considering a major life change, I understand that you still may appreciate seeing a rough estimate. For this starting point, NerdWallet has created the best cost of living calculator that I’ve found online.
Proceed with caution, though, if you start to get really specific with all of your spending categories. When I help other Millennial parents with budgeting questions, I often discourage them from creating rigid, line-item budgets. Ultimately, a plan to stick with numerous, detailed spending targets over the long-term can be counterproductive. You’re more likely to end up feeling frustrated and defeated when factors outside of your control intervene. Instead, I suggest devoting most of your time and attention to the largest expenses that you’ll encounter in Washington, DC or any other city. Here are the two costs that I focus on most often with my Millennial clients:
In your late 20s or 30s, you may decide that you want to become a homeowner. Current rent prices certainly may factor into that decision. According to Apartment List, as of January 2022, the median cost for a one-bedroom apartment in Washington, DC is $2,450. But the DC housing market doesn’t look any more favorable. As Urban Turf writes, “In the fourth quarter of 2021, the median price for a home in Washington, DC came in just below $700,000, the highest level on record for the city on a quarterly basis and almost 10% higher than a year earlier.”
Your interest in a different housing situation may relate to a decision to try to have kids. An expensive city often forces both parents to generate income in order to pay for housing and other monthly necessities. But that family dynamic requires some type of childcare, and daycare in DC annually ranks among the most expensive in the country.
In a 2021 report, Lending Tree writes, “The annual cost of daycare in DC for an infant — $24,081 — more than doubles the national average, contributing to D.C.’s ranking as the most expensive place to raise a child.” Earlier, in 2019, the non-profit organization Child Care Aware in America reported that, “In Washington, DC, the estimated child care cost for an infant in a family child care home and a preschooler in a child care center is $35,394.”
At what point does the cost of living in Washington, DC become too high for you? At what point do you reconsider how much value the cost of living in a particular city actually brings you? I regularly work with other Millennial parents, either as their financial advisor or through a financial wellness program. And some of the DC residents I meet would feel equally content living in another city, particularly if a move lowers their cost of living.
Even so, Washington, DC is a unique city. The District’s history, urban environment, amenities, and economy – including the people who come from around the world to work here – all contribute to make this city different. As a result, some people prefer to live here. If you fall into that category, you shouldn’t feel guilty or constantly anxious about your decision to build a life in DC. Ultimately, you’re making a choice about how you spend your money. That decision may require financial tradeoffs, but that’s a decision that you can – and should – feel empowered to make.
The cost of living in Washington, DC can cause residents to question whether they’re making a prudent financial decision for themselves and their families. If you’ve ever felt this way, you may find that specifically identifying the reasons why you’ve made this choice can strengthen your conviction and satisfaction.
When evaluating an expensive city such as Washington, DC, many people focus too much attention on the cost of living. This tendency looks similar in many ways to how we may obsess over our spending, but give less time to how we might earn more money. Here are three possible benefits of your location choices that may outweigh the expense side of the ledger:
Family is a common reason why people live in a certain location. For many Millennial parents, one or both partners either grew up in that area or moved there to be closer to family. And financial advantages or disadvantages often don’t play a major role in the decision. Rather, the opportunity to see family on a regular basis has an “incalculable” value that far outweighs other potential considerations. Comfort with particular aspects of the location, whether with a school district or the weather, only further supports this perspective.
Even so, the decision to live near family can indeed have meaningful financial implications. Some young adults may look at the city they resided in immediately after college differently as they age. A once-carefree living situation may now produce stress or frustration if it no longer fits your professional or family life as well. In this context, seeking out family support represents a prudent, proactive financial decision. And you likely will have the option to change cities in the years ahead if you’re able to build some wealth over time. But living closer to family is a reasonable (and very common) way to boost your financial stability while you’re in a new, more demanding stage of life.
And what’s wrong with wanting to spend your money on more time with family?
Younger workers often move to the District for an opportunity to establish themselves professionally with some of the most well-known organizations and companies in the world. But many of these positions, whether as short-term political appointees or interns, end after a relatively short period of time. Some of these workers then leave for other places, lending DC its reputation as a “transient” city. More recently, high housing costs have played an even larger role in why many 25-34 year-olds move away.
Migration patterns in Washington, DC are the most stable among older, higher-income individuals. This statistic may speak, in part, to how much people value the unique work opportunities available here. Washington, DC’s role as the nation’s capital means that organizations as varied as The World Bank, Amazon, Boeing, The Washington Post, Capital One, Marriott, and Pew Research Center call the DC metro area home. The people that these companies employ are well educated and highly skilled. They likely could find attractive jobs in many areas. But, for both personal and professional reasons, they choose to live and work here.
And what’s wrong with wanting to spend your money on fulfilling work?
The fortunate workers who earn high salaries may not feel forced to make difficult decisions based on housing costs or daycare in DC. Instead, they can make the intentional choice to pay for the advantages that living in Washington, DC offers. Ultimately, their perceived quality of life dictates where they decide to live.
The many different articles that “rank” cities are a testament to the fact that everyone evaluates “quality of life” differently. (This Washington Post article reports that DC is the 4th-best place to live in the country. But this one claims it’s only 19th, while this one doesn’t list DC at all.) When people hear “quality of life,” their thoughts often gravitate toward amenities, such as park space (DC ranks first, according to the Trust for Public Land). In the District specifically, visitors often marvel that all of the Smithsonian museums, including the zoo, offer free entry.
A city’s quality of life can impact key aspects of your life, including your health and personal finances. One reason that some people choose to live here is the option to walk, ride a bicycle, or take the subway to their everyday destinations. This can be an enjoyable way to commute, but it’s also likely to improve your health more than driving constantly. And having the option to not buy or lease a car can make budgeting easier. “Quality of life” may be a mostly qualitative concept, but it’s valuable to identify the aspects of this consideration that can align with your financial goals.
And what’s wrong with wanting to spend your money on quality-of-life benefits?
As with many life considerations, the COVID-19 pandemic may reframe how people make major life decisions, particularly related to employment and money. In May 2020, Washingtonian asked, “Would you stay in the DC area if you could work from home forever?” The article reported on a U.S. Department of Agriculture experiment, in which they offered employees the option to stay in DC or move to more-affordable Kansas City. Fewer than a third of USDA workers opted for the Midwest, and author Andrew Beaujon concluded, “Beyond ties their other family members may have, this can be a darn nice place to live.”
Even so, from a financial perspective, many people would jump at a chance to maintain their current salary level, but move to a low-cost city in the South or Midwest. This strategic evaluation starts with a fairly straightforward question: how similar of a salary can I earn in a significantly lower-cost city? Now that some privileged workers can work mostly virtually, the cost of living dynamic may shift significantly in the years ahead. Once young adults establish themselves as rising professionals in their fields, they may choose to use their money in much different ways.
No matter the reason you choose to live in Washington, DC, you may find yourself highly attuned to any financial strategies that can combat the high cost of living. While you can’t control certain financial factors associated with living here, you can improve your financial habits in targeted ways. As a starting point, I suggest focusing on these three aspects of your finances when you want to minimize the impact of an expensive city:
1. Invest early and consistently. Investing offers the best opportunity to grow your savings over time. Investing can keep up with inflation. You also may help to offset the larger amounts that you’ll pay for housing and daycare in DC. But successful investing for these purposes requires time and consistent contributions, even if only in small amounts.
2. Evaluate how much you value different expenses. If you’ve made an intentional choice to “pay for” the benefits that Washington, DC offers, then you understand the relationship between value and money. Try applying this same logic to your recurring expenses. How much do you value takeout multiple times a week? You probably don’t need to become frugal. You’ll greatly help your budget, though, by minimizing the smaller expenses that you don’t actually value.
3. Prioritize an emergency savings account. We often think about emergency savings for unexpected expenses like medical bills or a major car repair. But when you have a high cost of living, extra savings also can help out when you need to pay a lump-sum amount for daycare or school tuition. If nothing else, you should feel less stressed about your living situation knowing that you have additional funds at your disposal.
In high-cost cities, some residents reach a point at which they feel they must relocate to become or remain financially stable. For those with high enough incomes, the decision to stay or move can become highly personal and financially complex. What are you willing to give up to live near family, walk to a unique, fulfilling job, or access a variety of cultural amenities?
But the financial calculations can prove challenging even once you understand your priorities. Your housing costs may be high. But how much money and time do you save if you never need to use a car? How does D.C.’s universal pre-K education for three and four-year-olds offset what you would pay for childcare elsewhere? If you lived in a different city, would your cost-of-living-adjusted salary be less, more, or about the same? The list of potential considerations is longer than many people first realize. Ultimately, the choice depends on what you want out of life, both personally and professionally.
Thanks for reading today. I hope you’ll subscribe to this finance podcast for Millennials to learn more about how you can improve your financial wellness in the year ahead!
Kevin Mahoney, CFP® is the founder & CEO of Illumint, an independent firm in Washington, DC that offers financial planning for Millennial parents. He specializes in navigating the new financial decisions that arise during our 30s and early 40s, such as repaying student loans, buying a house, saving for college, & investing for the future. In addition, Kevin also leads a financial wellness benefits program for Millennial employees around the country, including group speaking engagements.
Bluey disregarded the structure of children’s cartoons to fit the creator’s objectives. What if we took the same approach with our money?
Great financial decisions aren’t always predictable. We shouldn’t let AI tell us otherwise.
When we focus on the aggregate, we see how we can succeed with our money. Even when we struggle with one particular aspect of our finances.