Lifestyle

Building Your Wealth: The Basic Types of Equity, Explained

Equity. We’ve all heard the term before and have just written it off as some fancy financial or banking concept.

It’s actually not that difficult to understand. And taking the time to learn it can help you prepare for retirement and accumulate more wealth for your future.

Fortunately for you, we’re going to be discussing equity in great detail. We’ll answer the question “what is equity,” we’ll talk about the different types of equity and building equity to provide for you and your family in the years to come.

So, without further ado, let’s dive in.

What Is Equity?

The definition of equity is the monetary value that you can attribute to someone’s assets or business. In mathematical terms, equity is defined as assets minus liabilities.

Let’s use real estate as an example. Let’s say you own a house worth $100,000, but you are paying a $50,000 mortgage note on it.

In this case, your house would be a $100,000 asset. But your mortgage balance would be a $50,000 liability because you owe that money to the bank. Therefore, if we subtract your liability ($50,000) from your assets ($100,000), you would have $50,000 in equity in your home.

We realize this is an oversimplified example, but it helps get the point across. Now that you have the idea of the concept let’s talk about some different types of equity.

Types of Equity

Two of the main types of equity you can have are stockholder’s equity and owner’s equity.

Stockholder’s equity can also be known as shareholder’s equity. It’s the amount of equity given to shareholders in a company after the company subtracts liabilities.

And with publicly traded companies, there can be thousands or millions of shareholders. After subtracting the liabilities, this equity is divided among everyone who possesses shares in the company.

Owner’s equity is the amount of ownership you have in a business. This could be your own business or a business partnership.

How To Build Equity

The most common vehicle for building equity in your home or investment real estate.

The more you pay into your home, the more equity you build. This is because as you make more payments, you are “buying” more of your home. As a result, the bank starts owning less and less.

If your home increases in value, you can also capture more equity this way. In most areas of the country, home values appreciate naturally. This is because most major metro areas are growing in popularity year-over-year and thus become more desirable.

In addition to the value increasing and making payments on your home, you can also make a large down payment. Putting this additional money toward the purchase price upfront will increase your equity right from the start.

Making extra payments along the way, as well as the natural appreciation, will build up equity very quickly.

If you have any more questions about building equity effectively, reach out to the pros at WealthAbility.

A Winning Plan

Using equity is a winning plan for you and your family’s future. Talking with a financial professional will help to put you on the right track for building the important types of equity early and often.

What are your thoughts on the subject? We’d love to hear your feedback in the comments below.

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