diff --git a/monkey/monkey_island/setup/island_config_options.py b/monkey/monkey_island/setup/island_config_options.py
index 938c840a0..5ce62ba2e 100644
--- a/monkey/monkey_island/setup/island_config_options.py
+++ b/monkey/monkey_island/setup/island_config_options.py
@@ -11,8 +11,9 @@ from monkey_island.cc.server_utils.consts import (
 
 class IslandConfigOptions:
     def __init__(self, config_contents: dict):
-        self.data_dir = os.path.expanduser(config_contents.get("data_dir", DEFAULT_DATA_DIR))
-
+        self.data_dir = os.path.expandvars(
+            os.path.expanduser(config_contents.get("data_dir", DEFAULT_DATA_DIR))
+        )
         self.log_level = config_contents.get("log_level", DEFAULT_LOG_LEVEL)
 
         self.start_mongodb = config_contents.get(
diff --git a/monkey/tests/unit_tests/monkey_island/setup/test_island_config_options.py b/monkey/tests/unit_tests/monkey_island/setup/test_island_config_options.py
index 9175bc274..35126a278 100644
--- a/monkey/tests/unit_tests/monkey_island/setup/test_island_config_options.py
+++ b/monkey/tests/unit_tests/monkey_island/setup/test_island_config_options.py
@@ -1,3 +1,5 @@
+import os
+
 from monkey_island.cc.server_utils.consts import (
     DEFAULT_DATA_DIR,
     DEFAULT_LOG_LEVEL,
@@ -16,11 +18,41 @@ TEST_CONFIG_FILE_CONTENTS_UNSPECIFIED = {}
 TEST_CONFIG_FILE_CONTENTS_NO_STARTMONGO = {"mongodb": {}}
 
 
-def test_island_config_options__data_dir():
-    options = IslandConfigOptions(TEST_CONFIG_FILE_CONTENTS_SPECIFIED)
-    assert options.data_dir == "/tmp"
-    options = IslandConfigOptions(TEST_CONFIG_FILE_CONTENTS_UNSPECIFIED)
-    assert options.data_dir == DEFAULT_DATA_DIR
+def test_island_config_options__data_dir_specified():
+    assert_island_config_options_data_dir_equals(TEST_CONFIG_FILE_CONTENTS_SPECIFIED, "/tmp")
+
+
+def test_island_config_options__data_dir_uses_default():
+    assert_island_config_options_data_dir_equals(
+        TEST_CONFIG_FILE_CONTENTS_UNSPECIFIED, DEFAULT_DATA_DIR
+    )
+
+
+def test_island_config_options__data_dir_expanduser(monkeypatch, tmpdir):
+    set_home_env(monkeypatch, tmpdir)
+    DATA_DIR_NAME = "test_data_dir"
+
+    assert_island_config_options_data_dir_equals(
+        {"data_dir": os.path.join("~", DATA_DIR_NAME)}, os.path.join(tmpdir, DATA_DIR_NAME)
+    )
+
+
+def test_island_config_options__data_dir_expandvars(monkeypatch, tmpdir):
+    set_home_env(monkeypatch, tmpdir)
+    DATA_DIR_NAME = "test_data_dir"
+
+    assert_island_config_options_data_dir_equals(
+        {"data_dir": os.path.join("$HOME", DATA_DIR_NAME)}, os.path.join(tmpdir, DATA_DIR_NAME)
+    )
+
+
+def set_home_env(monkeypatch, tmpdir):
+    monkeypatch.setenv("HOME", str(tmpdir))
+
+
+def assert_island_config_options_data_dir_equals(config_file_contents, expected_data_dir):
+    options = IslandConfigOptions(config_file_contents)
+    assert options.data_dir == expected_data_dir
 
 
 def test_island_config_options__log_level():