Equity is the value of your home at current market value after deducting the outstanding mortgage on your home, which is what you would have left over in the event that you sold your property at market value and repaid your outstanding mortgage. Home equity is built over time; as equity builds, you create a pool of money which your can utilize it later for many purposes.
In general, it is unadvisable to spend your equity money on things that do not give you ROI (return on investment) such as frivolous vacations. Use your home equity to clear your bad debts is actually a type of spending on your equity money. You could avoid yourself from trapping into debts by carefully plan your budget and spend with what you earn.
A smarter way of using your equity is use it to grow your equity further, spend on things that will bring you ROI. Ways to use your equity smartly include:
Start Your Own Business
You can use your home equity to borrow a low interest loan to generate the capital necessary to start your own business. Just be sure that you have a sound business plan in mind and that you have other safety cushions in place.
During the initial stage of your own business, you could maintain your reliable first income stream (to protect you against any cash problems) while working to bring your own business up to the stage.
A better home condition will increase your home's resale value. Hence you can dip into your equity to generate funds for home improvement. Your home improvement project will improve your home condition and provide you with a more comfortable living, and you could get a higher resale price whenever you want to sell it. But remember that not all home improvement projects will contribute equally to your homes resale value.
Growing equity is a great way to generate fund for your children education needs. You can get loan against your home equity for your children educational needs. Using your equity to invest on your children education will get them a brighter future and at a better position to compete in the challenging job market.
Improve Your FICO Score Debt is unavoidable for many people as long as we have credit cards, mortgage or car, but you could prevent yourself from trapping into bad debts condition by carefully planning your budget and spending with your financial affordability. Instead, your equity can help you to improve your FICO score. By paying off creditors, you can improve your FICO score and potentially qualify for a lower refinancing rate. To make the most out of this process, know your interest rates, for both savings and debts. You can get help from expert such as an accountant to help you with the calculations. With so many rate variables in play, its easy to get confused about how to consolidate, how to pick the right term for your home equity loan, and how much to allocate to savings and how much to allocate to payments.
Home equity is the money you have put down against the principal of your house as a savings account, be aware that if you fail to budget effectively and over draw your equity. You could lose your house, wind up in credit trouble, or even have to file for bankruptcy. Hence, use your equity smartly is a great way to pursue your wealth building.
Controlling, or Implementing, the Investment Plan will be accomplished best by those who are least emotional, most decisive, naturally calm, patient, generally conservative (not politically), and self actualized. Investing is a long-term, personal, goal orientated, non- competitive, hands on, decision-making process that does not require advanced degrees or a rocket scientist IQ. In fact, being too smart can be a problem if you have a tendency to over analyze things. It is helpful to establish guidelines for selecting securities, and for disposing of them. For example, limit Equity involvement to Investment Grade, NYSE, dividend paying, profitable, and widely held companies. Don’t buy any stock unless it is down at least 20% from its 52 week high, and limit individual equity holdings to less than 5% of the total portfolio. Take a reasonable profit (using 10% as a target) as frequently as possible. With a 40% Income Allocation, 40% of profits and dividends would be allocated to Income Securities.
For Fixed Income, focus on Investment Grade securities, with above average but not “highest in class” yields. With Variable Income securities, avoid purchase near 52-week highs, and keep individual holdings well below 5%. Keep individual Preferred Stocks and Bonds well below 5% as well. Closed End Fund positions may be slightly higher than 5%, depending on type. Take a reasonable profit (more than one years’ income for starters) as soon as possible. With a 60% Equity Allocation, 60% of profits and interest would be allocated to stocks.
Monitoring Investment Performance the Wall Street way is inappropriate and problematic for goal-orientated investors. It purposely focuses on short-term dislocations and uncontrollable cyclical changes, producing constant disappointment and encouraging inappropriate transactional responses to natural and harmless events. Coupled with a Media that thrives on sensationalizing anything outrageously positive or negative (Google and Enron, Peter Lynch and Martha Stewart, for example), it becomes difficult to stay the course with any plan, as environmental conditions change. First greed, then fear, new products replacing old, and always the promise of something better when, in fact, the boring and old fashioned basic investment principles still get the job done. Remember, your unhappiness is Wall Street’s most coveted asset. Don’t humor them, and protect yourself. Base your performance evaluation efforts on goal achievement… yours, not theirs. Here’s how, based on the three basic objectives we’ve been talking about: Growth of Base Income, Profit Production from Trading, and Overall Growth in Working Capital.
Base Income includes the dividends and interest produced by your portfolio, without the realized capital gains that should actually be the larger number much of the time. No matter how you slice it, your long-range comfort demands regularly increasing income, and by using your total portfolio cost basis as the benchmark, it’s easy to determine where to invest your accumulating cash. Since a portion of every dollar added to the portfolio is reallocated to income production, you are assured of increasing the total annually. If Market Value is used for this analysis, you could be pouring too much money into a falling stock market to the detriment of your long-range income objectives.
Profit Production is the happy face of the market value volatility that is a natural attribute of all securities. To realize a profit, you must be able to sell the securities that most investment strategists (and accountants) want you to marry up with! Successful investors learn to sell the ones they love, and the more frequently (yes, short term), the better. This is called trading, and it is not a four-letter word. When you can get yourself to the point where you think of the securities you own as high quality inventory on the shelves of your personal portfolio boutique, you have arrived. You won’t see WalMart holding out for higher prices than their standard markup, and neither should you. Reduce the markup on slower movers, and sell damaged goods you’ve held too long at a loss if you have to, and, in the thick of it all, try to anticipate what your standard, Wall Street Account Statement is going to show you… a portfolio of equity securities that have not yet achieved their profit goals and are probably in negative Market Value territory because you’ve sold the winners and replaced them with new inventory… compounding the earning power! Similarly, you’ll see a diversified group of income earners, chastised for following their natural tendencies (this year), at lower prices, which will help you increase your portfolio yield and overall cash flow. If you see big plus signs, you are not managing the portfolio properly.
Working Capital Growth (total portfolio cost basis) just happens, and at a rate that will be somewhere between the average return on the Income Securities in the portfolio and the total realized gain on the Equity portion of the portfolio. It will actually be higher with larger Equity allocations because frequent trading produces a higher rate of return than the more secure positions in the Income allocation. But, and this is too big a but to ignore as you approach retirement, trading profits are not guaranteed and the risk of loss (although minimized with a sensible selection process) is greater than it is with Income Securities. This is why the Asset Allocation moves from a greater to a lesser Equity percentage as you approach retirement.
So is there really such a thing as an Income Portfolio that needs to be managed? Or are we really just dealing with an investment portfolio that needs its Asset Allocation tweaked occasionally as we approach the time in life when it has to provide the yacht… and the gas money to run it? By using Cost Basis (Working Capital) as the number that needs growing, by accepting trading as an acceptable, even conservative, approach to portfolio management, and by focusing on growing income instead of ego, this whole retirement investing thing becomes significantly less scary. So now you can focus on changing the tax code, reducing health care costs, saving Social Security, and spoiling the grandchildren.