Managing your finances is stressful enough without hearing unfamiliar words and being expected to know what they mean. After all, financial jargon can be intimidating! There are a lot of terms to remember, and a lot of people aren’t up to snuff with each industry term. And that’s okay. We’re here to help. A great example of a word you hear a lot but might not be positive you understand it’s meaning is the word equity. An informed consumer is the best consumer. So let’s dig into what this term means.
You’ve probably heard phrases like “home equity loans” or “private equity”, which could very well make you uneasy. Some people, like myself, are often embarrassed to ask what a word means for fear of looking silly. Rather, they look the word up online, like you did and landed here on this post! The truth is that with a little research, most financial terms aren’t too difficult to understand.
The word equity means the value of an asset after all the liabilities and debts have been paid. To represent it mathematically, Equity = Assets – Liabilities. The term refers to the value of a specific ownership. For example, when you purchase a home and repay your mortgage, you gain equity (ownership) in that home which was previously in the hands of your lender. As you’re managing debt and repaying what you owe, the value in that home becomes yours. The owner’s equity is the difference between the value of the asset (in this case a home), and the liability (mortgage loan).
Is It Similar to Net Worth?
Yes! It is also known as net worth. As you mature and have more assets in your name (house, car, money in your bank account, investments, etc.), your equity/net worth increases. Generally, as your assets increase, so do your liabilities (money owed). The goal is to decrease your liabilities and increase your assets by paying off debts.
You may also have heard of equity in terms of businesses. If a stockholder contributes 50% of the funds towards a business, they hold 50% ownership in that business, plus earnings (or losses).
Additional Terms Explained
If you’re looking for clarification on any more financial terms, check out these awesome resources: