How to Grow Equity

Paying down your mortgage builds equity every month.

Paying down your mortgage builds equity every month.

You have many choices available to build your financial nest egg for the future. Simple steps that you take now can increase your personal equity, or net worth, and put you on the path to achieving your financial goals. Building your equity starts with removing unnecessary debt and continues with saving money in many different areas. As you build a diversified portfolio of investments, you end up not only with greater personal equity but with safer equity, since a problem with one investment is less likely to harm other investments.

Pay down high-interest rate debt as quickly as possible. One excellent strategy is to pay down your highest rate credit card, then go to your next highest rate credit card and on and on. While some debt, like a reasonable mortgage, can be a very good thing, other debt, like credit cards, is usually just a waste of money. Once you pay your debts down, don't run them back up. Since you have created additional monthly income by eliminating debt payments, you should have enough money to save and to pay cash for the things that you buy.

Build a rainy-day fund of at least three to six months earnings. While this fund probably doesn't generate gigantic investment returns, it can help to keep you afloat if anything goes wrong. It also saves you from having to tap into other investments, letting them keep growing for your long-term benefit.

Take advantage of tax-deferred savings plans with employer matching. While tax-deferred savings plans are valuable, having your employer match your contributions is a way for you to receive free money to save. If they give you a 50 percent match, you've just effectively turned an investment that returns six percent into one that returns over nine percent.

Contribute as much as possible to your Roth IRA. While you have to put after-tax money into your Roth IRA, you are able to withdraw your money and all of its growth completely tax-free when you reach retirement. For 2013, the IRS allows taxpayers to contribute up to $5,500 to their Roth IRA. When you're young, the ability to have tax-free growth can add up to significant money down the line.

Contribute to tax-deferred plans even if they do not have employer matching, whether they are a 401(k) at work or a traditional IRA. Since you're contributing money before you pay taxes on it, you end up having more of it working for you until you withdraw it and pay the taxes on them.

Buy a house. If you can buy a house with a similar payment to what you are paying in rent, it effectively doesn't cost you anything. However, you are building equity in the house while deducting your property taxes and mortgage interest, which should generate additional monthly after-tax income from you. It's a good idea to start out with a smaller home that is affordable as you're still building your personal equity. As it goes up in value and your income grows, you can sell it and move up.


About the Author

Steve Lander has been a writer since 1996, with experience in the fields of financial services, real estate and technology. His work has appeared in trade publications such as the "Minnesota Real Estate Journal" and "Minnesota Multi-Housing Association Advocate." Lander holds a Bachelor of Arts in political science from Columbia University.

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