• Michael Armocida

Financial Freedom: The Power of Cost Neutrality


Most of us do not take time to learn how to build wealth because we believe it is harder than it really is

DISCLAIMER: I am not a registered investment, legal, or tax advisor, or a broker/dealer. All investment and financial opinions expressed in this blog are from my personal research and experience and are intended as educational material. Investing money is a personal decision that you should only make after doing your own thorough research and/or consulting with a financial professional.


If you read my book Strong & Happy, then you know my philosophy for building wealth includes counting pennies because pennies do add up. Once you have accumulated enough pennies, you can invest that money, which is easier today than ever before, and the money you invest makes more money, which in turn makes even more money. This is how people like me build wealth. More importantly, it is how the rich become rich and stay that way.


Another secret of the rich is that of cost neutrality. I first learned of cost neutrality when I was a young salesman. Clients would often say that they are willing to purchase my product as long as the costs were the same as what they are currently spending. This allowed them to keep their current levels of spending while continuing to increase their incomes. Put simply, cost neutrality is the concept of taking on a new asset (property, car, toy) and adjusting your expenditures to prevent a net loss. In other words, if my monthly cost of living is $5,000, and I buy a car that costs an additional $300 month, then to be cost neutral, I must reduce my monthly expenses by $300. In some cases, I do not necessarily have to reduce my expenses. Instead, I can trade ownership of something to make up for the cost of my new purchase. For instance, if I purchased a sofa for $1,000, then I can sell something else I own for $1,000 as an even trade. The trick here is to trade a liability for a liability, or better yet, trade a liability for an asset. An asset is something that makes you money, and a liability is something that loses money. If you want to grow wealth, then you must accumulate assets and reduce liabilities. When it comes to the latter, applying the technique of cost neutrality is a must.


My readers may also know that I hate liabilities. When it comes to liabilities, I am almost allergic to them, and I avoid them at all costs. Sadly, life comes with unavoidable liabilities. One such liability is that of inflation, which leads to a higher cost of living. One method to reduce these liabilities is by maximizing the return on your money (see my previous blog post Financial Freedom: Investing 101). Another is to keep track of the Consumer Price Index (CPI), which essentially measures the annual increase for the cost of living. For instance, you can use CPI (https://www.bls.gov/cpi) to assure that your rent increase does not exceed the cost of living. If your monthly rent payment is $2,500 and your landlord increases it to $2,600, then you are incurring a 4% increase. If the CPI for the prior year was only 2%, then you can use that information to negotiate a lower rent payment. If the landlord does not negotiate, then move. The cost of moving will be less that incurring an unfairly higher cost of living each year. When I lived in Long Island, I incurred an 8% annual increase in rent with the CPI coming in at 1.5%. So, I moved to New Jersey and signed into a two-year lease. Now, I incur an annual increase of 0.5% with the CPI coming in at 2%. All I need do is get an annual salary increase of 0.6% or more for this liability to become an asset.


When it comes to cost neutrality, I am no slouch there either. Recently, I purchased a ranch in Wyoming. Since this is not my primary residence, I consider the purchase of this property an investment (a.k.a. an asset). However, the property comes with carrying costs (liabilities) in the form of property tax, property insurance, and upkeep. Luckily, the property taxes in Wyoming are quite low, so the carrying cost of my property amount to $2,000 a year ($167 per month). I can easily afford to carry a liability of $167 per month with little to no impact on my lifestyle, but why should I? By applying the concept of cost neutrality, I can invest that $2,000 for a return of $200 in year one, $220 in year 2, and $242 in year 3 (average annual return $220). Two hundred and twenty dollars may not sound like much, but it is two hundred and twenty dollars more than I had before. This is the mindset you must take if you wish to build wealth. Look at it this way, if you were given the choice of having a liability that would cost you $2000 per year, or an asset that gave you $220 per year, which would you chose?


This is how I did it:


1. My entertainment costs with Hulu were $65 per month for live TV and streaming. By losing the live TV option and replacing it with free alternatives like Samsung TV Plus and Pluto TV, I saved $60 per month. This equated to an annual savings of $720.


Annual Liability $2,000

- Hulu savings $ 720

Annual Liability Remaining $1,280


2. My lady and I often treated ourselves to a new rented movie once or twice on the weekends. These costs averaged out at $500 year. By choosing to rent only $0.99 cent movies, along with steaming free movies on Crackle, Hulu, Pluto TV, Tubi, and Peacock; this annual liability was reduced to $25 – equating to an annual savings of $475.


Annual Liability $2,000

- Hulu savings $ 720

- Movie rental savings $ 475

Annual Liability Remaining $ 805


3. The cost of a food-based multivitamin for my lady and I was $3.00 per day, totaling $1,095 per year. With a little research, I was able to find an equivalent, all natural, food-based multivitamin with more efficient packaging that cost only $0.75 per day ($273 per year). This equated to an annual savings of $822.


Annual Liability $2,000

- Hulu savings $ 720

- Movie rental savings $ 475

- Multivitamins Savings $ 822

Annual Liability Remaining -$ 17


If you are living paycheck to paycheck, then you do not have to buy land or apply cost neutrality to apply the logic shown above. As I discuss in the Strong Wallet section of Strong & Happy there is always a way to save a few pennies. Once they are saved, you can parley those pennies into dollars, parley those dollars into hundreds, parley those hundreds into thousands, and so on.


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