Ask Liz Weston

Dear Liz: I’m doing all the right things: accumulating an emergency fund, contributing to retirement funds and paying down the mortgage. I currently save about $12,000 of my $90,000 annual salary. Beyond this, how do I take the right steps to large wealth accumulation, as in $3 million to $5 million?

Answer: You’re already on your way. If you bump up your retirement contributions by at least the rate of inflation each year and earn an 8% average annual return over time, you should hit $3 million in about 35 years.

If you want to accumulate your fortune faster, you should save more, achieve a better-than-average investment return, or both.

If you’re serious about accumulating wealth, get a copy of “The Millionaire Next Door” by Thomas J. Stanley and William D. Danko. The authors outline how people really get rich in the U.S.: by living well below their means and making saving and investing a priority. Many of them also have their own businesses. The risk of failure for small businesses is high, but those who succeed keep more of the upside than those who work for someone else.

Stanley and Danko repeatedly make the point that the millionaires they studied were more interested in building wealth than in displaying high-status trappings. They tend not to drive fancy cars, wear expensive watches or spend a fortune on clothes. In his most recent book, “Stop Acting Rich,” Stanley makes the point that millionaires also tend to spend modestly on homes: Few have more than one, and most choose houses and neighborhoods that are easily affordable, rather than a strain on their finances.

These books can provide you a road map for your own path to wealth and provide inspiration for the journey.

The authors of a new personal finance book make a perfectly accurate, and perfectly ironic, observation about money advice today—which is that most of it seems geared to people with steady paychecks, ignoring freelancers and the self-employed.

Joseph D’Agnese and Denise Kiernan have written a terrific new guide, “The Money Book for Freelancers, Part-Timers and the Self-Employed,” to address that gap. More on that in a minute.

The reason most advice assumes traditional employment is that most workers (about 75%) are, in fact, traditionally employed, working for a company that pays them at regular intervals. But that leaves quite a few who don’t have traditional jobs, including (here comes the irony) a lot of the people writing that personal finance advice.

I’m self-employed. So is Kathy Kristof of MarketWatch. So is Ilyce Glink of ThinkGlink.com. All the big guns—Suze, Dave, David, Robert—are self-employed. So are many of the best personal finance bloggers who, even if they haven’t yet left their day jobs, are typically earning money on the side.

So we all know the pain of paying for all our own benefits, saving for retirement without a match, irregular incomes, estimated tax payments and clients who don’t pay or pay late. Yet too often that experience isn’t reflected in what we write.

Of course, the best advice is universal. Live below your means. Track your spending. Save for the future. Know your goals and have a plan to get there. But how you get there is going to be a little different when you’re on your own.

Once they cover the basics of organizing your finances, estimating your future income and figuring out where your money is going, The Money Book’s authors have some great suggestions. One of them is to save a percentage of each check you receive for taxes, retirement and emergencies, rather than saving a set dollar amount each month for those goals. With irregular incomes, your dollar amount may be too big one month and too little the next. (Ideally, you’ll be saving 25% to 30% to cover taxes, 10% to 15% for retirement and maybe 5% for your emergency fund. That may seem like a lot, but the tax portion at least is about what an employer would slice out of a regular paycheck.)

That’s just the start of their good advice. If you’re self-employed or your income is irregular, I’d strongly encourage you to pick up this book.

Dear Liz: I have a brother-in-law who has a very hard time finding employment because he has frequent seizures. He is 59 and needs about $40,000 a year for living expenses, including high health insurance premiums because of his condition. Thanks to a recent inheritance and some good investing when he was younger, he has about $1.3 million in assets. However, he has little chance for further meaningful employment, so he needs to live off of his investments. What is the best way for him to stretch his assets? Would a fixed annuity be a wise thing for him to invest in? Would a mix of an annuity and regular investments be a better bet? Or should he look at just a mix of fixed income and equity investments?

Answer: Any of those options could work, or could be a disaster, depending on the details of his financial situation.

A fixed annuity, for example, could give him a monthly check for life, with inflation adjustments if he chose, but he would have to commit a big chunk of his available funds to get the kind of return he needs. He also would be buying the annuity when interest rates are quite low, which means he would get a smaller payment than if he bought when rates were higher.

Investing outside an annuity would give him more flexibility, but no guarantee he’d get the kinds of returns he would need to last him for life.

His best bet is to consult with a fee-only financial planner who can review his options and suggest the best course for him. He can get referrals to fee-only planners from the National Assn. of Personal Financial Advisors at www.napfa.org or to fee-only planners who charge by the hour from Garrett Planning Network at www.garrettplanningnetwork.com.

Dear Liz: We’re refinancing our mortgage and home equity loan and will be paying about $200 less per month. Would we be better off applying this extra money toward the mortgage so we can pay it off in less than 15 years? Or would it be better to put it into savings or invest it?

Answer: Most people have better things to do with their money than pay off a low-rate, tax-deductible debt such as a mortgage — especially if you’re already on the road to paying it off in 15 years.

You should first make sure you’re on track with your retirement plan. If you’re not already getting the full company match from your 401(k) or 403(b), that extra $200 could win you an instant 25% to 100% return, depending on the generosity of the company match.

Even if your plan doesn’t have a match, you could get a tax deduction on your retirement contributions that you won’t get paying down the principal on your mortgage. Plus, your money is likely to earn greater returns over time than what you’d net by paying off your loan early.

If you’re maxed out on saving in your workplace plan, consider contributing to a Roth IRA. If you’re on track for retirement, paying off other debt and bolstering your emergency fund would be the next smart moves. Once that’s done, review your insurance coverage to make sure you’re adequately protected on the life, disability and long-term-care fronts.

Only after you’ve got all your financial bases covered should you consider accelerating your mortgage payments.Don

photo credit: abductit

Some of the country’s top financial planners were asked about the toughest questions they got from their clients this past year, and how they answered them.

The panel at Sunday’s Financial Planning Association session in Anaheim included Elissa Buie, Michael Branham, Harold Evensky, Tim Kochis and Ross Levin. Ron Lieber of the New York Times moderated.

The discussion was illuminating enough that I shared it on Twitter and am doing so again here. Below you’ll find my tweets and some comments expanding on important points. Read and learn from some of the best financial planning minds in the country.

Tough question #1: Didn’t you see this coming?

Toughest client ?: Didn’t u see this coming? CFP Buie: This was always in the realm of possibility. Can’t predict timing.

Evensky: It only seems obvious in hindsight. We will not see it next time, either.

Kochis/Levin: Clients feel emotionally planners failed them. Planning is more than technical. Part of job is dealing with pain.

My take: True financial planners (all the above are CFPs) have studied market history and knew big drops were possible–in contrast to investment salespeople who didn’t have such training and were caught flat-footed. True financial planners set up clients’ portfolios with an eye to worst-case scenarios. But planners will still have to help their clients through the emotional shock of losing money, since you don’t really know your risk tolerance until you’ve seen what a loss really feels like.

Tough question #2: Did asset allocation fail?

Did asset allocation fail? Branham: In crisis everything tanks. AA did work in that fixed income provided safety net.

Kochis: AA not designed to work in ST; designed to work over long periods & looks like it will.

Levin: we got this same ? in different context in 1999: shouldn’t you be all in tech stocks?

Evensky: Asset allocation worked very well. We just allo’d in some of the wrong places. Fixed income/LT Treasuries did very well

Evensky: AA does not protect against losses. It’s about better managing risk. One client: I don’t have to be happy but I don’t have 2 worry

Evensky’s comment about allocating in some of the wrong places was actually a laugh line (those are SO hard to communicate in 140 characters), but his serious point was that not everything tanked and that asset allocation doesn’t protect you against all losses anymore than it guarantees you the highest returns. It’s about getting the right mix of risk and return.

Tough question #3: What IS within our control?

wht IS w/in R control? Kochis: spending, major purchases, charity, family wealth trnsfr (silver lining: low values, low int rates)

Kochis: also, risk tolerance/return expectations. Evensky: that, & security selection. You have a great deal of control.

Buie: Ppl control just about everything other than market/economy. Knowing this helped keep some from jumping out window

Buie: Ones who reduced spending felt the most control. The well adjusted recognized the importance of human capital (ability to earn).

Branham: You can control saving rate, media intake, how they react. They can focus on important things in life.

The markets and economy may not be within our control, but our spending and saving levels certainly are. Buie noted that those who controlled their spending had the greatest sense of mastery of all her clients. She added that we also control our human capital–our ability to earn. We can find new ways to make money, start businesses, work longer, etc. Branham noted that a steady diet of “the sky is falling” news reports don’t tend to help us feel calm and in control, but focusing on what’s really important (family, relationships, etc.) does. Kochis pointed out that the market swoon and low interest rates actually gave wealthy families opportunities to transfer assets with less of a tax hit and to make other advantageous estate-planning moves.

Tough question #4: Do I have to change my lifestyle (cut back, retire later, give up the dream)?

Do I have 2 change my lifestyle? Levin: this is a ? abt control. Life happens. If we pretend omniscience, we do a disservice.

Levin: Only way you guarantee lower lifestyle is to give up on stocks.

Branham: 4 most, no. It’s life cycle dependent (harder 4 early/near retirees). Just as important we dn’t get 2 frugal as we dnt ovrspnd

Kochis: Essential not to overreact, do things u can’t reverse. take in stages, don’t assume everything’s changed 4ever

Buie: Ways 2 live a big life: Using home exchanges, hug some1 (prefbly some1 u know), give blood. It’s abt more than $$.

Kochis: some clients convinced it’s different this time. Not so much now, but definitely in March.

Levin: I was afraid in March. Most important is to put [on your own] oxygen mask first. Have to believe what u tell clients

Evensky: there is risk no matter what. We believe the safe thing to do is to stay invested.

Levin was pretty candid about his own emotions as the market plummeted. As I wrote above, knowing this could happen is different from experiencing it yourself. The planners saw some of their colleagues abandon long-held financial planning principles when the fear got to be too much. Levin said it was important to get a handle on his own fears so he could better advise his clients.

Tough question #5: How can I be sure you’re not a crook?

Moderator @ronlieber says his family advisor got arrested 4 theft, so this is top of mind 4 him.

How can I be sure UR not a crook? Evensky: trust but verify. Look @ ur statements. Determine who is holding ur $. Shldnt be advisor.

There is no guarantee from credentials or length of time in biz.

Buie: 3rd party custodian is essential. But statmnts dont protect against forgery. custodians must report more clearly, educate clients

Levin: a lot more $ gets lost thru bad advice than thru crooks. Clients shldn’t be bullied.

Buie: some annuities being sold have high expenses, limited upside. Being sold using fear. Concerns her.

A few scam artists are so sophisticated that their schemes are tough to detect. One big red flag for these planners is when the advisor is the custodian of the funds, rather than a third party. Levin points out that bad advice costs people far more (in high expenses, mediocre returns, etc.) than scam artists do.

Dear Liz: My husband and I are having a rough time making it from paycheck to paycheck. We make pretty good money. We have four children and end up helping them every month. We cannot seem to make it without going in the hole in our checking account. Could you please help me with what we should do?

Answer: As writer Erica Jong once said, advice is what we ask for when we already know the answer but wish we didn’t.

You know what you need to do: Cut off your children (assuming they aren’t minors, of course). If you can’t make it from one paycheck to the next, you’re in no position to help anyone else. Your children may not know the financial straits you’re in, or they may not care; either way, it’s up to you to close the Bank of Mom and Dad.

Once that financial spigot is shut off, you’ll need to look for the other leaks in your financial system. Track where your money is going using personal finance software such as Quicken, online tools such as Quicken Online, Yodlee or Mint, or a notebook and a pen.

If you’re still spending more than you make, you’ll need to find ways to cut back so that you not only don’t go in the hole but are putting aside money each month. You need to save for retirement and for an emergency fund, among other goals.

To do all this, you’ll need to use a word that apparently hasn’t been given enough of a workout around your home: “no.” “No, we can’t help you.” “No, we’re not going to buy that.” “No, I’m not going let my finances be in chaos because I can’t say ‘no.’ “

MSN and American Family Insurance are looking for two more families to profile on upcoming episodes of “Building a Brighter Future,” a Web site with videos, tools, resources and advice for improving your finances.

I’ll visit the chosen families in their homes to provide a money makeover, just as I did the four families already featured on the site.

If you’re interested, CLICK HERE for how to enter. Entries must be received by 8:50 a.m. Pacific Time on Oct. 5.

MSN’s Building a Brighter Future features money makeovers of four families, along with checklists, advice and resources to get a handle on your finances.

We’re also looking for two more families to feature in upcoming shows. If you’d like to be considered, click on the “Be on our show” tab at the top.

And check back as we add more articles, tips and tools to help you build the future you want.

Well, you’ll get advice from Liz, anyway, if you’re chosen as one of the families to be featured in a series of personal finance Webisodes produced by MSN.

We’re looking for families with children who have questions about money issues, such as the best way to save for retirement or college, how to create a workable budget, the right way to pay off debt, protecting yourself from identity theft, how to polish your credit scores and more.

You would need to live in one of the 19 states served by the series sponsor, American Family Insurance: AZ, CO, GA, IA, ID, IN, IL, KS, MN, MO, ND, NE, NV, OH, OR, SD, UT, WA, WI.

If you’re interested in participating, please use the “Ask Liz a question” form on this site (CLICK HERE). Include in your message:

• Your full name
• Your city and state
• A daytime phone number where you can be reached
• A description of your family (everybody’s names and ages)
• Your top three financial questions or concerns

Graduation ceremonies are just around the corner, which means there will be a bumper crop of advice coming graduates’ way.

Here’s what I wish every graduate knew about money:

It’s up to you to watch your overhead. If you want finances that work, you’ll need to limit your “must haves”–rent, food, utilities, gas, minimum loan payments and insurance premiums–to no more than half your after-tax income. Some grads blow 40% to 50% just on rent in high-cost areas, which means they’re guaranteed to struggle to make ends meet.

Ditch that credit card debt. It’s toxic, and you want it out of your life. The smartest habit you can develop is paying your credit cards in full each and every month of your life.

Stretch out the federal loans, pay off the private. Federal student loan debt is cheap and flexible, so it’s okay to consolidate it into a loan for the longest possible term (up to 30 years if you owe enough) to minimize your payments. Concentrate instead on paying off that private student loan debt, which is far more expensive and offers fewer options if you get into a financial jam.

Start contributing to your retirement. Yup, the market’s scary, but you’ll need stocks’ inflation-beating returns if you want to retire someday. And procrastination will hurt you big time. Someone who starts saving for retirement at 22 can wind up with a 30% bigger nest egg than someone who waits just 5 years to start. Sign up for a 401(k) if you’re eligible; otherwise, start contributing to a Roth. (You probably aren’t in a high-enough tax bracket to get much of a break from contributing to a traditional IRA, and Roth contributions, though not tax-deductible, grow tax free for retirement.)

Weave your safety net. You’ll want enough cash and access to credit to tide you over in an emergency. Just $500 in the bank is a good start; after you get the cards paid off and get signed up for retirement, start building up that emergency fund.