How Big a Nest Egg?

Question of the week:I've been saving for retirement for some time now, but I really have no idea if it's enough. How can I find out the total amount that I'll need to retire comfortably? --Joplin Mom

Dear Joplin,

You're to be congratulated for trying to arrive at the amount you'll need for retirement. You're definitely in the minority in taking this important first step to securing your future. According to a 2002 survey by the American Savings Education Council, only about one-third of all workers say they have tried to figure the amount they will need for their retirement years.

We recently asked members of the Armchair Millionaire community about how they are calculating this amount. These comments highlight just two of the many variables that need to be taken into account:

Is the house paid for? "We figure that by retirement, our home will be paid off, and we won't be saving for retirement, so we will only need about one-half the income we get now." --Meg H.

Will you have a pension? "It can vary by a tremendous amount depending on if you/spouse will have a pension. If you don't, the amount you will need could exceed $2 million." --Dave H.

There is no fast, easy way to know exactly how much you'll need to retire in style. You need to consider two types of variables: those you can predict with accuracy (such as what you can save now and the annual income you'd like to have during retirement), and those you can only take an educated guess at (like the rate of inflation, the return on your investments both before and during retirement, and how long you'll live).

There are a number of different retirement planning calculators available on the Web for free, and they are also included as part of many personal finance software packages. To varying degrees, these calculators take the variables into account and provide you with an amount that you will need and what you need to save now to reach that goal. I strongly encourage you to run the numbers with several of these calculators.

Here are some sites with retirement planning calculators:

• Money.com
• Quicken.com
• FinancialEngines.com

It's very likely that the amount you arrive at will surprise you. Depending on how much income you'd like to have during retirement, the total amount you'll need could easily exceed a million dollars. But don't let this discourage you. By taking a few common sense steps, you'll put your goal well within reach. My checklist will get you started.

The Armchair Millionaire Checklist for Growing Your Nest Egg

• Start small but think big. Compounding returns on your savings will make a little grow to a lot. For example, by saving just $300 a month, with a nine percent average annual return, you'll end up with a bit over $500,000 in 30 years.

• Minimize your taxes. Every buck you don't have to pay in taxes is another buck for your nest egg. Maximize every tax-advantaged account available to you, including an IRA and 401(k).

• Invest smart. This means buying and holding for the long term, using intelligent asset allocation and minimizing your costs. Index funds are the perfect tools for doing all of this.

• Dollar cost average. Worried about investing at the wrong time? Then invest the same amount every single month, month in and month out. This is called "dollar cost averaging" and over time, it will boost your portfolio's performance, even when the stock market fluctuates.

THE BOTTOM LINE: Saving for retirement is the biggest financial job of your life. Don't take it on without a clear idea of exactly what you want to achieve.

Creating Order from Chaos

Question of the week:I'm constantly overwhelmed by the amount of financial paperwork there is to deal with. Any suggestions for a system for keeping everything organized? --W.N.W.

Dear W.N.W.,

When we posed your question to members of the Armchair Millionaire community, we found that nearly everyone fell into one of two groups: Those who are wedded to their filing cabinets, and those who are proponents of personal finance software. Here are two examples of the comments we received:

Go with paper. "I keep a file with folders sub-categorized for 'retirement,' 'monthly bills,' 'bank statements' and 'taxes.' It's nice, neat and ready for a quick review." --Wade

Go with software. "Using personal financial software is a must. It's the best way to control where your money is spent, to set up and control a budget, and to see your cash flows. This makes your whole financial life more fun." --Doug

But as important as it is to have a system for organizing all your paperwork-whether you do it with file folders or software-it's only the start. You need to get at the root of the problem by taking steps that will simplify and streamline your finances. My checklist has some suggestions.

The Armchair Millionaire Checklist for Simplifying Your Financial Life

• Consolidate. If you have accounts with six different investment companies (you'd be surprised at how many people do), consider consolidating with one fund family, or at least consolidating into one account with a discount brokerage company. You'll cut down on paperwork, and probably save on fees, too.

• Automate. Stamps are going the way of the dinosaurs for good reason. Nowadays, nearly any financial transaction you make on a regular basis-whether it's an investment (such as monthly deposit into your IRA), a loan payment (such as your mortgage), or a bill (such as your utilities or insurance payments)-can be automated. Take advantage of it in order to reduce the sheer volume of paperwork you handle.

• Reduce redundancy. You gain little (except a paperwork headache) from having multiple investments with similar objectives and holdings. For example, two different large company growth mutual funds will largely overlap in what they own, and deliver largely the same results.

• Go paperless. Most brokerage and fund companies will be happy to send you their account statements, prospectuses and reports via email. It saves them money, and saves you filing hassles.

• Only keep what you really need. Do you really need that electric bill from four years ago? Or that annual report from three years ago? Probably not. Don't automatically keep everything that arrives in your mailbox-decide what you really need to keep for the long-term, organize it, and toss the rest.

THE BOTTOM LINE: It's impossible to get a handle on your finances if you're swimming in paper. By simplifying your overall approach, you'll reduce your paperwork load and free yourself up to focus on your big financial picture.

A Cure for the Retirement Blues

Question of the week:It's starting to look like another tough year for the stock market and I'm getting seriously concerned about not being able to retire when I'd planned. Any advice for me? --Jesse H.

Dear Jesse,

You're in good company. A survey conducted last year by financial software provider Intuit found that 13 percent of those surveyed anticipate delaying their retirement because of stock losses. A full quarter of these said that they will have to work an extra five to seven years in order to retire comfortably.

When we asked members of the Armchair Millionaire community about how the market has affected their own retirement plans, we heard a wide range of responses:

"I still plan to retire in my 50s (I am 30 now). I view the current downturn as a buying opportunity and am contributing the maximum I can to my retirement plans." --M. Donald

"Today's situation doesn't bother me that much, because I see the possibility to get 'a lot for a little.' I invest on a monthly basis and have a long-term horizon. This helps a lot to get through rough times. And better days will surely follow ..." --Debbie

"While I lost a good percentage of my 401(k) last year, I'm not worried as I'm only 40 and have definite goals and plans to reach those goals." --Stacy

"The past three double digit negative years have not been pleasant, but with the longer run view of a market up by 10 percent annually over the past fifteen years, I am still in great shape. My retirement plans have not been altered a bit." --Frank S.

What do all these Armchair Millionaires have in common? They're not letting today's market volatility veer them away from a common sense course. So don't despair about your situation and take some concrete steps to ensure a financially secure retirement. My checklist will get you started.

The Armchair Millionaire Guide to Keeping Your Retirement Plans on Track

• Give to your retirement accounts 'til it hurts. Contribute the most you possibly can to your tax-advantaged retirement accounts, such as your 401(k) and/or IRA. Ideally, contribute every single dollar you're allowed.

• If you're over 50, play catch up. People over 50 years old can contribute even more to their retirement accounts. The law currently allows an extra $2,000 contribution to 401(k) accounts, and an extra $500 in IRA accounts. These amounts will go up slightly in the next several years.

• Manage your portfolio wisely. This means:
  • Be diversified. It's hard to beat mutual funds for diversification, and it's hard to beat index funds for low costs.
  • Have the appropriate mix of investments. As you draw closer to retirement age, you'll want to become more conservative and add more cash and bonds to your stock investments.
  • Get professional advice. A portfolio checkup by a financial advisor can be invaluable for folks approaching retirement age.

• Work one more year. Just working a single year longer than you'd planned can make a big difference in your retirement fund. Not only will you delay drawing down your retirement money--giving it another year to grow--you'll add an extra year's worth of savings to it. Also, depending on your age, waiting to start drawing your Social Security could result in a larger benefit.

THE BOTTOM LINE: Market downturns call for you to pay more attention than ever to the time-tested fundamentals. What makes good sense in ordinary times goes double now, so focus on leveraging tax-favored accounts, saving as much as you can, being smart with your investment choices and, above all, staying the course.

You're Never Too Young to Start

Question of the week:I'm 22, one year out of college and working full time. My parents have been bugging me to open an IRA, but I just don't see that saving for retirement should be a priority at my age. What do you think? --Danny in St. Joe

Dear Danny,

While it's true that you have plenty of time before retirement, it's also true that time is your single best ally in building a healthy retirement fund. The more time compounding has to work, the better off you'll be, and waiting just a few years will make a huge difference.

When we recently asked members of the Armchair Millionaire community whether they are funding their IRAs this years, we heard from several in situations very similar to your own who are enthusiastically saving for retirement:

"My husband and I contributed the max to Roth IRAs in 2002 and already have the max set aside for our 2003 Roth IRA. We are in our early 20s and have added to our accounts ever since we got part time jobs in college." --Alpy

"My wife and I just started investing in IRAs this year. We're both 23 so we wanted to get a head start and be in good shape for retirement." --Ryan

And we heard one note of regret at not beginning years ago:

"My spouse and I fully fund our Roth IRAs each year. We are both in our mid 30s and have been doing this for three years, but we wish we had started much sooner." --DSW

These folks all understand the real benefit of starting young to save for retirement. It helps to look at it in terms of real dollars. Assuming that you'd like to retire at 62, you have 40 years to work with. Let's say that you were to follow Mom and Dad's advice and start putting $3,000 a year into your IRA now, and continue doing so for each of those 40 years. Assuming an average annual return of 10 percent (about the historical norm), you'd have $1,460,555 by the time you hit retirement.

Let's assume, on the other hand, that you put off saving for retirement for the next 10 years, and started when you were 32. Again figuring a $3,000 annual contribution and a 10 percent annual return, you'd have only $542,830 at retirement! By missing those early years, compounding would lose much of its power, and you'd end up with almost a million dollars less.

Convinced now of the wisdom of starting young? If so, my guide will show you how to start funding your IRA.

The Armchair Millionaire Guide to IRAs

• The two types. The traditional IRA and the Roth IRA will both help you reduce your taxes, but with one main difference. The traditional IRA bestows that tax break now, in the form of a deduction, while the Roth gives you a break later, when your withdrawals during retirement will be tax-free. If you're unsure about which is better for your situation, I recommend that you consult with a tax advisor.

• Contribution limits. I'm often asked, "How much should I should I put in my IRA?" My answer is nearly always the same: "As much as possible! Have you ever met a retiree who believes they saved too much for retirement?" You can contribute $3,000 to your IRA this year, which is the same as 2002. If you have more than one IRA, your contributions to all of them can total no more than $3,000.

• Income limits. Both the traditional and Roth IRA have income limits that determine whether you can contribute and, in the case of the traditional, how much of a deduction you can receive. The Roth has much higher limits and most people qualify to contribute to one. The IRS spells out the limits on its Web site as www.irs.gov.

• Opening your account. Nearly every mutual fund company and brokerage offers IRAs, as do many banks. Simply contact one to request an IRA account application.

THE BOTTOM LINE: Put time on your side--start saving for retirement today. And if you even want to play a little catch up, you still have until April 15 to fund your 2002 IRA.

Don't Sweat the Big Stuff

Question of the week:This year, I'm going to pay off all my debt, get started on my retirement fund, and begin saving a down payment on a new house. What should my strategy be for accomplishing all this? --A Proud Texan

Dear Proud Texan,

Whoa! Slow down there, Tex! Great things are hardly ever achieved all at once. You'll vastly improve your chances for succeeding in achieving your big goals if you break them down into smaller, attainable steps.

Here are a few examples of very achievable financial goals that members of the Armchair Millionaire community recently shared with us:

"To reduce frivolous spending and increase my variable annuity contributions." --Rebecca

"To use a check card instead of credit cards for purchases so that I don't have to pay interest." -- Steve G.

"To continue to put at least 20 percent of my gross income into long term savings." --Tim A.

"To increase my 401(k) contribution by half of whatever raise I receive each year." --Paula

"To set aside money each month for a Christmas Club account." --Mary

"To pay off my remaining credit card debt with my tax refund. " --Wade

See how these are all simple, doable actions? To arrive at these, I suggest that you first identify which goal is most important to you, and then focus on small, specific steps that will help you achieve it. My guide will show you just how easy it is to whittle big financial chores down to size.

The Armchair Millionaire Guide to Getting a Grip on Your Goals

• Save a pile of dough. Creating and following a budget in order to squeeze out a few dollars of savings is hard. Paying yourself first is easy-just have a set amount automatically transferred from your checking account into another bank account that you don't touch until you need it. What it takes: A call to your financial institution to request an automatic withdrawal form and a few minutes to fill it out and return it. (And if you think you don't make enough to save anything, then save your next raise-you'll never miss it.)

• Downsize your debt. Paying off a pile of credit cards is difficult, but committing to paying off the one with the highest interest rate is easy. What it takes: Review your credit card statements and locate the one with the highest interest rate. Pay the most you can towards that one. After you eliminate that debt, tear up that card and repeat with the next highest interest rate card.

• Secure your retirement. The thought of savings hundreds of thousands of dollars for retirement is daunting. Funding your 401(k) or IRA each month is easy. What it takes: A quick visit to your employer's HR department to get started. If your employer doesn't offer a retirement plan, just call your favorite mutual fund or brokerage company for an IRA application.

• Protect your stuff. Achieving peace of mind is a challenge. Getting an insurance checkup to make sure you have enough coverage is a piece of cake. While you're at it, find out what you can save by increasing your deductibles. What it takes: A single phone call to your insurance agent.

• Know where you stand. Knowing where every dollar is going and what every investment is doing is hard. Starting to track this information piece by piece until you have the complete picture is easy. What it takes: Pick up a personal finance program (such as Quicken or Money) and dive in.

THE BOTTOM LINE: Don't set yourself up for failure by trying to achieve major goals all at once. By breaking your journey to financial security down into manageable steps, you'll find it easy to start on your way.

You Can't Take It with You

Question of the week:My New Year's resolution for 2002 was to make a will, and I still haven't gotten around to it. Any thoughts to get me in gear and get it done? --WSJ

Dear WSJ,

I can think of few things that cause more procrastination than wills. Most people know that they should have a will, yet only about 30 percent of Americans actually have one.

But if you need some motivation to make a will, just consider what will happen if you die without one. Your assets will be spilt up between your spouse and kids according to state law. If you don't have a spouse or children, it will go to other relatives. And if you don't have any other relatives, the state itself will get your money. How does that sound?

And if that isn't motivation enough, think about what your family may have to deal with. This recent comment from an Armchair Millionaire community member said it well:

"I had a will made about six years ago. Dying without a will is one of the worst things you could do to your family. Do it now to save a lot of legal grief later." --Doo

The good news is that preparing a will really does not need to be a huge headache. My guide shows you how easy it can be.

The Armchair Millionaire Guide to the Basics of Wills

• What makes them legal. In order to be valid, there are just a few requirements for wills, including:
  • It must state that it is, in fact, your will.
  • You must sign and date it.
  • It must be signed by two or three witnesses (depending on your state) who are not beneficiaries of the will.
  • You must be of legal age and sound mind when you make the will.

• How to prepare a will. There are a number of different do-it-yourself book and software programs out there for making your own will, but this is one area where I really do recommend you use an attorney. In most cases, the fee for preparing a will is not expensive, and can more than pay for itself later. Because the laws dealing with estates and probate can be quite different from one state to another, it's important to use an attorney familiar who knows the law in your area.

• Who to name as executor. Your executor will be in charge of ensuring that your wishes are carried out. Unless your estate is terribly complicated, you can choose anyone who is comfortable taking care of legal and financial matters. This could be a friend, relative, your spouse, or one of your children, provided he or she is of legal age. If you do have complex affairs, consider naming an attorney with knowledge of estate issues to act as executor.

• About your beneficiaries. In every state, your surviving spouse will have least some kind of legal claim to a portion of your estate, no matter what your will states. In addition, any property that you own with someone else as a joint tenant with rights of survivorship will automatically go to that person. Also, money in a pension plan, 401(k) or IRA, as well as the proceeds of life insurance, will go to the person (or people) you named as beneficiary on the account forms. Otherwise, with a few other exceptions, you can give your assets away to anyone you like--all your will needs to do is clearly state your wishes.

• Where to keep your will. A lot of people stash their wills in their safe deposit boxes, but I suggest you not do this. Unless their names are on your box rental agreement, they will not be able to access it immediately after you die, and may even need to get a court order to get it opened. I think the best place is for your lawyer to keep the original, and make sure that your executor knows the name of your lawyer.

THE BOTTOM LINE: People often make a much bigger deal of making wills than they really need to. What really will be a big deal, however, is if you die without one. Make it a priority to get this straightforward chore done soon.

Charting Your Financial Course

Question of the week:I'm determined to make a fresh financial start this year, and a friend has suggested that I see a financial planner. I wonder it that's really necessary--what do you think? --Susan F.

Dear Susan,

I believe that any family with multiple sources of income, different kinds of assets (for example, IRAs, a house, company investment plans), or diverse goals (like a secure retirement and sending the kids to top-notch colleges) could benefit from working with a financial planner in some way.

According a recent survey by the Certified Financial Planner Board, building a retirement fund is far and away the top reason that people create financial plans, but numerous other goals also spur folks to working with a financial planner, including building an emergency fund, managing debt, buying a home, paying for travel and saving for college, to name but a few.

When we asked members of the Armchair Millionaire community about how they'd been helped by financial planners, we received a number of very positive responses. This one is typical:

"My wife and I sat down with a planner about four years ago and it was the best thing we ever did. We were in our early 30s, with two kids, no insurance, no plan, lots of debt, and no savings. We were on a bad road going nowhere. We are now debt-free (other than our mortgage), and I watch our plan monthly to make sure we stay on track." --David

A good planner will help coordinate all the different aspects of your financial life: saving, spending, investing, tax planning, insurance and estate planning. Depending on the complexity of your situation, a planner can also work with your other professional advisors, such as a stockbroker, accountant or attorney, to ensure that you have the best overall strategies in place. If you decide that a planner can help you, my guide will tell you what to expect when working with a financial planner.

The Armchair Millionaire Guide to Finding and Using a Financial Planner

• Ask about credentials. Anyone can call himself or herself a financial planner, so find one who has credentials from a recognized authority. Perhaps the best known is the Certified Financial Planner (CFP) credential awarded by the Certified Financial Planner Board of Standards. CFPs must take a series of specialized courses, pass a comprehensive exam, and keep current through continuing education.

• Find a good match. You want a planner who has plenty of experience working with people like you in terms of goals, income and assets. Often the best way to do this is to get referrals from friends or co-workers who have similar financial situations. Before you agree to work with any planner, ask to see a sample of the plans they typically produce to see if it would meet your needs.

• Understand what it will cost. Planners are compensated either by fees (an hourly fee or a flat fee), by commissions (on products they recommend you buy), or a combination of the two. Planners who manage your assets on an ongoing basis may charge a percentage, typically in the neighborhood of one percent of the assets. If you only need a comprehensive financial plan but want to implement the plan yourself, then paying a flat fee or by the hour may be your best choice.

• Know what to expect. To begin, your planner will ask you to provide a variety of financial records and will ask detailed questions about your goals. He or she will then use this information to prepare a comprehensive plan that will typically include an overview of your financial goals, an assessment of your current situation (including income, spending, and investments), and recommendations to reach your goals (including investment mix, insurance and estate planning). Your planner will then meet with you to review the plan and help you implement it.

• Keep your plan current. I suggest meeting with your planner once a year at a minimum to review your progress and make any changes as needed. In addition, work with your planner to make adjustments any time there is a major change in your life, such as marriage, a job change, or an inheritance.

THE BOTTOM LINE: Working with a financial planner to chart your financial course takes a lot of work, a bit of expense, and a commitment to sticking with the plan. But the rewards are well worth it-you'll begin moving towards what you really want and earn some financial peace of mind.

Love and Money

Question of the week:My fiancé and I are getting married at the end of the summer and have been discussing how we'll combine our finances. My parents have always told me that I should keep my own bank account after I get married, but we really do want to share everything. What do you think? --Ready to Tie the Knot

Dear Ready,

It's great that you're talking about these issues now. Money in general can be a major source of tension in many marriages, and the way you handle your day-to-day financial affairs as a couple can make a big difference in your happiness over the years.

So is it better to have separate accounts or one joint account? We asked members of the Armchair Millionaire community about how they manage money with their spouses, and were overwhelmed by the number of responses we received. They all tended to fell into three categories:

Share everything. "My husband and I have one household account. We discuss our expenses and saving every month and track all bills together. We agree about our money and respect one another's opinions." --Veena

Keep everything separate. "We own and pay for everything separately, including property, cars and investments. We own nothing jointly. This has worked well for us and we've been together for 27 years." --Debbie in Ohio

Do a little of both. "We have three accounts: Hers, Mine and Joint. We both contribute an equal percentage (averaged based on our salaries) to the joint account for all bills, and we hardly ever disagree about money." --Jason

As you can see, this question has three right answers. Only one will be right for you and your spouse but there's no reason why you can't try each of them before settling on your own.

To set the foundations for marital bliss (at least in money matters) you'll also need to agree on the big issues beyond daily money management--the ones that will impact your entire financial life for years to come. Read through my checklist below to identify the key steps you and your fiancé should consider to start out right.

The Armchair Millionaire Checklist for Happily Combining Finances

• Set clear goals together. Agree on the short-term goals that you want to accomplish over the next three years (like paying off debt or saving for a home down payment), as well as long-term goals, like early retirement or a college fund for the kids. It's critical for you both to feel committed to these goals, because they'll guide just about every financial decision you make together.

• Get involved. Both of you should be involved in all your household's money matters. That doesn't mean that you need to make every decision jointly, but you should reach a clear understanding of who does what (who manages the checkbook, for example, and who tracks the retirement accounts) and establish ways to keep one another informed.

• Decide on beneficiaries. You may want to change the beneficiary of your IRAs, 401(k), annuities and pensions to your new spouse. This can have important tax ramifications, however, so I suggest you consult with an accountant before doing so. Also, if you choose to make your new spouse the beneficiary of your life insurance, be sure to make that change.

• Make an estate plan. Even if you you're young, you should both have wills. Nothing else will so effectively ensure that your wishes for your spouse and family are carried out if you were to pass away.

THE BOTTOM LINE: Achieving financial tranquility can be one of the most challenging aspects of marriage. Give yourself the best odds for getting there by mapping out an overall financial plan with spending, saving and investing goals that will work for both of you.

Navigating the Financial Advice Maze

Question of the week:With all the upheaval in the markets lately, I'm ready to get some professional advice about where to go from here. It seems like there's so many kinds of financial advisors these days-how do I find the right kind?
--Mike in Milwaukee

Dear Mike,

Lots of people are feeling the way you do these days. According to a survey of upper-income households done by the Certified Financial Planners, 22 percent of respondents use financial planners. We asked folks in the Armchair Millionaire community about their experiences with financial advisors, and here are some of the responses we got:

"An independent advisor can insist on discipline and really help fill in your financial education gaps. It allows you to rest assured that someone else is looking at your financial well being." --Peter

"Combining my knowledge of money with the expertise of someone who works to achieve my financial goals has been a great experience for me. I think it would be necessary for most people." --Michael R.

"I use my CPA as my advisor. She gives me a lot of advice--not about stocks or funds--but about ways to define my financial life that have lots of advantages that I wouldn't know about otherwise." --Paulie

With everyone from attorneys to accountants and insurance agents offering investment advice and services these days, it's not easy to sort through your choices and make a decision. My guide will help.

The Armchair Millionaire Guide to Financial Advisors

Referrals from friends or coworkers are a good place to start, but be sure to get them from people who have they same kinds of financial goals and challenges as you. These people will be much more likely to refer you to advisors who are best suited to working with you. Also, if you already work regularly with a CPA, attorney, or insurance provider, they may be a good source of referrals.

• Where do I find an advisor?
• What kind should I get? Lots of different professionals offer financial advice now, and the major types can overlap a bit, so it can be confusing. Anyone can call him or her self a financial advisor, so work with someone who has been credentialed, ensuring that he or she has a certain level of knowledge and experience. Here are the major types of advisors:
  • Financial planners provide overall planning assistance, though many may specialize in one area such as retirement or education planning, tax guidance, or insurance. Many planners have earned the Certified Financial Planner (CFP), Chartered Financial Consultant (CFC) or, for CPAs, the Personal Financial Specialist (PFS) designations.
  • Investment advisors give advice about securities, and must be registered with the Securities and Exchange Commission or their state securities commission, depending on how much money they manage. Their credential is usually either an Investment Advisor (IA) or Registered Investment Advisor (RIA).
  • Insurance agents can sell and give you advice about insurance, and must be licensed in their state to do so. Many agents hold the Chartered Life Underwriter (CLU) credential.
  • Accountants can offer tax planning help and hold the Certified Public Accountant (CPA) designation.

  There are three ways advisors can get paid:

  • Fee-only advisors are paid only for their advice, not for selling products (such as mutual funds, stocks and annuities to name a few). Depending on the advisors, they may charge a percentage of your portfolio (typically one to two percent), by the hour, or a flat annual fee.
  • Fee-based advisors are paid by a combination of fees for their advice and commissions from selling products but derive their income primarily from fees.
  • Commission-based advisors earn their money strictly from the commissions on the products they sell.

• What will it cost?

THE BOTTOM LINE: In my experience, fee-only or fee-based works best for most people. Paying your advisor primarily based on fees gives you a greater assurance that your advisor has fewer conflicts of interest and is most likely to work with your best interest in mind. However, any advisor should spell out exactly what you'll be paying and what you'll receive in return.

Raising Money-Savvy Kids

Question of the week:I'm the father of two young children and I want to do everything I can to make sure they know how to make good financial decisions when they grow up. What should I be doing to teach them about money? --Denver Dad

Dear Denver,

Your kids are lucky to have a parent thinking about teaching good money skills. When we polled Armchair Millionaire community members about how much their parents had taught them about money and investing, a resounding 79 percent said, "Nothing." We also asked them to tell us how they are teaching their own kids, and got a range of good ideas:

Model good behavior. "Let your actions speak for themselves. Young people are going to emulate the people around them so if your kids see you being reckless with money, there's a good chance they'll follow suit." --Marcus

Let them in on the family finances. "I made an enlarged copy of a check that I had written to American Express in the amount of $1,107.48. I showed it to my nine year old and his eyes got as big as quarters! Now he knows that plastic credit cards are not actually endless sources of money." --Tammy S.

Start young. "As soon as kids are old enough to ask for cookies, comic books, and/or cash, they are old enough for their first of many financial awareness discussions." --Perry

These days, when our paychecks are deposited automatically and our cash is spit out of ATM machines, it can be challenging to teach kids the real value of money. The key is to set them up to succeed while grounding your lessons in real life. Lectures about saving and investing will mean little if your kids don't have the opportunities to experience their own achievements and failures with money. My checklist provides some ideas on raising financially literate youngsters.

The Armchair Millionaire's Checklist for Raising Money-Wise Children

• Entice them to save. Help your child set up a savings account and get them going with a $50 or $100 deposit. Offer to match some portion of every dollar they save, and be sure to review their account statements with them so they understand the contribution that interest is making to their grubstake.

• Teach smart spending. Let's not forget the other side of the coin-spending. If kids don't learn about living within their means, all your good advice about saving and investing will add up to naught. Help them make a realistic budget and stick with it.

• Show how much debt really costs. If your child asks for a loan, help them out, but charge a realistic rate of interest--and insist they pay it. They'll quickly learn how expensive it can be to use other people's money.

• Start them in stocks. Investing will stop being an abstract concept the moment your kids have some stock of their own. You can start them out with a gift of one or two shares of a well-known company (check out gift stock brokerages like, www.oneshare.com) and follow it with them weekly in the newspaper or online. As they get older, help them buy stock themselves through a dividend reinvestment plan. Offered by many blue-chip companies, these plans allow small stock purchases of a single share or even fractions of shares. Most have low initial minimum requirements and many allow regular additional monthly investments of as low as $25. You can find complete information on these plans at www.netstockdirect.com.

THE BOTTOM LINE: The financial lessons and habits learned in childhood can last a lifetime. To help your child grow to an adult who wisely handles money and investments be a good role model for them and teach them through real-life learning opportunities whenever possible.