Equity is what is left over after you figure out what you own less what you owe. This is called your balance sheet. You don’t really own your home until the mortgage you pay is fully satisfied. If you don’t believe me, remember back to 2008. How many people bought homes and lost those homes. The banks didn’t come in and say gee you are a nice person you can stay in the home awhile until you can pay again. The banks took the homes.
What you own are your assets. What you owe are your liabilities. Assets minus liabilities is what you have left over. It has nothing to do with your cash flow or how much you make or how much you spend. How much you make and how much you spend is more about whether you have money or are broke each month. As you may have guessed, preserving wealth is about building your equity. Building and preserving what you have left over. What you have left over can’t be taken from you because you don’t owe anyone. Once your car is paid off, once your copy machine is paid off, once your home is paid off, it is yours to do with as you please. No one can tell you what to do. How many of you like people telling you what to do? How many of you would like to be in a position where you can’t be told what to do? The only way to do that is to build equity and the only way to build equity is to get rid of debt and put money away. We will discuss putting money away a little later.
Get out of debt. Credit cards are evil. You say to yourself oh I will buy this nice drill set or microwave or stereo on credit. I will pay it off next month. Next month comes and you see the credit card bill. Except that your son had to go to the doctor suddenly because he broke his arm or your daughter had an unexpected dental bill. I don’t have $300 to pay off the credit card. Oh look. I only have to pay $20. I can do that and so you do. The next month the statement comes and the debt is now $282..80. Wait a minute, I thought I paid off $20.00. Well you did but the interest on the $280 remaining was 10% per year so 1% of $280 is $2.80. That’s $2.80 that you now have to work for and you received nothing from it.
Suddenly your hours get cut and now you can’t pay the credit card at all. Except you used the credit card to pay for your car repairs, your gasoline, your frappe latte, your hairstyle, your new pants, your subway sandwich and now the credit card is $2,000 and it is costing you $20 per month in interest. Failing to pay the bill the banks (the really nice ones that like you) hike the interest to 20% so now the interest is costing you $40 plus the late fees and penalties of another $40. Suddenly your $300 dollar microwave, drill set or whatever is now over $2,500 and it keeps going up. You are working for nothing. How much could you do with an extra $40, $60, $100 per month. Get out of debt.
How do you build equity toward your wealth preservation. You have to save and put money away. When you save and put money away then you start letting that money work for you and grow without you having to work for it. Owning rental properties is a great way to build equity. You buy a property (yes it is not yours yet). You rent the property and the rental income you make goes to pay the debt so it costs you nothing. When the property goes up in value you get the benefit of that increase and you didn’t have to work for it. That’s building equity on your way to fortifying your wealth.