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Equity

Equity is simply your share of the assets you possess.

What is Equity?

Also known as net equity and net worth, it is the true value of your stored resources, usually money. Often we have many assets but 'forget' to subtract the liabilities from it. For example I might have a house worth $99,000. I might say I'm worth $99,000 but if I still owe the bank $66,000 then my real equity is $33,000. Simply put if I sold up everything and paid back all I owe, then the equity would be what's left.

How to Calculate Equity

This is calculated by taking away the total liabilities (owed to others) from the total assets leaving your share, known as your equity. It can be expressed as;

 

Equity = Total Assets – Total Liabilities

 

For example, the diagram on the left shows a pie view. The whole pie is your total assets and the red piece is your total liabilities, thus what is left is your net equity. Another view would be the diagram on the right where the blue bar represents the asset's value, the green bar the liability, and the red bar the equity.

 

Equity PieEquity

 

Let’s say you a only own a car and its value is $5,000, but you owe $5,000 for it then you are worth zero dollars.

How Does Equity Affect My Life?

WARNING: Net equity is not the be-all and end-all of existence. Knowing this will make your life a little easier when dealing with banks and other lenders or planning for retirement. A low equity is nothing to be ashamed of, I know of plenty people who have a high financial net worth and are still unhappy. Happiness comes from within yourself, if your are proud of yourself and treat yourself well then you will be happy.

Further Reading

Equity (wikipedia)