“The thing is, Bob, it’s not that I’m lazy, it’s that I just don’t care.”
― Peter Gibbons, Office Space (1999)
Commuting to work sucks. And unless you hit the coworker lottery, chances are you’re spending money to get to somewhere you don’t want to be anyway. However, since the internet era, you can often choose a job that doesn’t require you to commute to an office. When you do the math, you might be surprised at how the numbers come out!
How Much Does Commuting Cost?
If you don’t know, you’re not alone. The mainstream media prefers to focus on visible costs like avocado toast and Hulu subscriptions, but hidden costs like commuting are a much bigger deal in terms of your overall spending. Estimates vary, but the average American commutes about 16 miles to work each way, and the overwhelming majority do so by car.
You can make a ballpark estimate of your per mile costs pretty easily– the IRS hires consulting firms to create a standard mileage cost estimate, which can be cross-checked with sources like AAA. The standard mileage deduction currently sits at 62.5 cents per mile. My research has indicated this number is fair, although commuting costs may be a bit lower for sedan drivers and higher for SUVs and trucks.
Next, we can assume you work Monday-Friday on non-holidays. This generally adds up to 252 days per year. 1 Therefore, the total cost of the average commute is (16 x 2) *(0.625), or ~$20 per day. For the year, this will cost you $5,040. Finally, commuting is not tax-deductible either for income tax purposes or FICA, so assuming a 25% federal, state, and local tax rate means the average commute costs $6,720 of pretax income. That’s a lot of avocado toast!
These numbers can get crazier, in large part because they’re poorly understood. Imagine you’re a young couple who finds a house 30 miles outside of town. Property has skyrocketed in value in many areas, so it’s quite common for people to look further out–even if they’re commuting to a downtown area every day. If both spouses commute 30 miles each way 252 days per year, the estimated cost is $18,900, which eats up an astounding $25,200 in pre-tax income assuming a 25% combined tax rate. On the other hand, living close to work literally gives you the equivalent of a tax-free yield in cost savings. For a couple earning $100,000 combined, this is an easy trap to fall into: the effect completely swamps more popular ways to save money like cutting subscriptions or silly stuff like not eating avocado toast. Far from being cheap, the far-out house is a value trap that saddles you with steep ongoing expenses. The experience of the 2008 housing bubble showed that these were some of the hardest hit areas in the crash (i.e. the Inland Empire of LA, and inland areas of South Florida.)
If you push the hypothetical further, it’s actually possible to lose money at your job! The most common way this happens is a long commute for a minimum wage job. The second most common way this happens is when both spouses work and there’s no real benefit to the lower-earning spouse working after accounting for costs like taxes, daycare, and commuting. 2
Working From Home Saves A Lot Of Money
If that same couple from above both worked from home, then they’re putting an extra $18,900 annually in their pocket. Not everyone can or should work from home–the pandemic made this clear. But if you’re part of the knowledge economy, there’s an excellent chance you will have the chance to choose between a job that allows you to work from home and one that doesn’t. And the way to figure out what is best is to run the numbers. And even if you work in a traditional job that requires you to commute to the office, this will help you determine whether living closer or further from work is the best move.
I’ve attached a free spreadsheet for your convenience to help you decide what maximizes your “net income.” By treating your job like a business and treating commuting costs, housing, and state/local taxes as your expenses, it’s much easier to get clarity on where to work, where to live, and so on.
The ability to work from home, combined with knowledge of cost of living differences and state & local tax differences creates clear opportunities to build wealth.
There are different ways to approach this.
One way to approach this is to move to a lower cost of living area if you’re not required to commute (like my home state of Texas, as we have no state income tax). You can even push this further by considering working abroad as many “digital nomads” have done. I will note that the cost of living in Texas has risen dramatically to the point where you can look on Zillow and see that houses in nice areas of Dallas are more expensive than houses in nice NYC suburbs 3. Runaway property tax increases and rising energy costs will soak up income similarly to commuting, so you need to look at the full picture here too. These are all pros and cons, but you can effectively boil these down to a spreadsheet to compare the value of different job opportunities and locations.
Another way of thinking about this is that property in coastal areas of places like California is more expensive, but potentially a better value. When you dig into hidden commuting costs, worse weather & A/C bills, worse air quality inland, and desirability for resale–the obvious implication is that properties that are more expensive are likely better than they appear at first glance. Spreadsheets like mine can’t tell you where you’ll be happiest, but what they’re good at is telling you where the value is and where potential value traps are.
Key Takeaways
Commuting is more expensive than you think and is not tax-deductible.
Living close to work essentially gives you a tax-free yield.
Working remotely saves a lot of money, and the amount it saves can be quantified, helping you make lifestyle choices like where to live and work.
Think about your job like a business, considering taxes, commuting costs, and housing–what’s left over is your net income. This will help you maximize what you keep.
Doing business or working on the internet allows you to arbitrage some great opportunities between income and cost of living in the US or abroad, or alternately can free up money to live in desirable coastal areas.
The working year is now 251 days if you get Juneteenth off, but most Americans don’t.
It is possible that technology like EVs and hybrids can bring down commuting costs in the future. For example, you might be able to get your commute cost down on a long commute by buying an EV. Understanding the problem to begin with is the first step to solving it, and most people have no idea where their money is going.
Who knows if this will last?? The housing market appears to be in a national/international bubble right now, so I wouldn’t be buying anything now, even the research shows owning a home is a good long-term investment in a typical market environment. I’ll likely follow up on this later. Do note that the houses rarely have basements here in the south, so be careful comparing square footage numbers with property in northern states.
Outstanding content, Logan. You have a talent (and put in the effort) for spotting specific potholes in available content/subject area/conventional reasoning and filling them concisely, with an appropriate mix of observation, theory and recommendation. I find your style very accessible and engaging. Great stuff--appreciate your contribution to the financial corner of the town square.