Wealth is just for the supersmart and for heirs and criminals, right?

Not so.

"Defining wealth is like asking people what kind of art they like. It's a very personal thing and an ongoing process," says Gregg Fisher, the president of Gerstein Fisher, a financial advisory company in New York.

Wealth can be measured in simple dollars and cents, in how much time your finances allow you to spend with your family or in what you're able to contribute to a charity.

By any measure, Ken and Rhonda Daniels' family was nowhere near wealthy. The San Francisco-area family lived in a small apartment with three kids and a cat named Prudence. They planned little for the future. Living paycheck to paycheck on Rhonda's salary from her local-government job and Ken's disability pay, the couple dreamed of travel, homeownership and a comfortable retirement. But their aspirations seemed like just that: dreams.

Yet even a family like this, with a modest income of $50,000 a year, can achieve its goals -- and wealth.

Here are the key components of any road map to riches:

  • Short term. Get a handle on your debt and establish a safety net.
  • Midrange. Determine how you'll spend your money during your working years.
  • Long term. Set a target for how much you'll need once you've stopped working.

With that information in hand, you're ready to create a plan based on your goals and to start saving.

For each of these three time horizons, there's a place to keep your money. Whether you get the mix of stocks, bonds and other investments right will in large part determine how successful you are in reaching your goals.

First things first

The first step is to figure out what you want to do. Send the kids to college? Open a business? Take a year off to travel the world? Stop working for the weekend?

Put those dreams in writing, then begin crafting a map for achieving those goals, Fisher says. "You can just hope it all works out, but in my experience, if you keep doing what you've been doing, you probably won't get here," he says. "You have to be willing to change your habits a little bit, and you need to have an objective measure by which you can see if you're making progress."

What should this map include? First, lay out your goals (more on this below). Then compare your assets with your debts -- all the cash, investments and valuable possessions you own minus what you owe on credit cards, student loans, mortgage and car loans, and what's owed to friends and family. By subtracting your debts from your assets, you derive your net worth. For many in the early years of a mortgage or with other large debts, this may be a negative number.

Short term: Balance debt with a cushion

Short-term goals are the things you want to achieve within five years. These goals should begin with paying down debt and creating an emergency fund, if you haven't already done so.

These and longer-term goals require a fundamental of personal finance: the credit score. This three-digit figure gives you (not to mention potential lenders) an indication of how well you manage money and how you're likely to manage it in the future.

The Danielses were worried that their income level and lack of savings meant their credit scores would be terrible. But with Ken's at 710 and Rhonda's at 530 (out of a possible 850), their average qualifies them for a mortgage for a four-bedroom, two-bath home that's among their goals.

Assessing your debts is the next step. List each of your debts with its corresponding interest rate, then attack the ones with the highest rates first. This is an important exercise in investing and wealth building. You will make more-confident money decisions once you understand that high interest rates can eat away at your money much faster than low-interest investments can line your pockets.

For example, let's say you carry a credit card debt of $20,000 at a lousy annual rate of 15%. If you pay the minimum, calculated at the annual percentage rate plus 1% of the balance, it will take you more than 34 years and cost you almost $25,000 in interest to pay off that $20,000.

Meanwhile, if that $20,000 were invested in a savings account at the current going rate of 1.5% for the same 34-year period, you would earn more than $13,000 in interest. The lesson: Pay off the debt first, then start investing.

That said, it's critical that everyone have a financial cushion. Most experts advise three to six months' worth of living expenses, though that number has crept up to a year or more in this age of high unemployment rates.

These emergency funds can be saved gradually via regular contributions to a checking or savings account, even while you work toward other financial goals. Even though interest rates on these accounts are very low at the moment, the important thing is to ensure that the money is set aside, Fisher advises. "Getting this done is more important than whether you're earning 1% or 2%," he says.

Fisher suggests that if you are saving for any financial goals outside of the basics, the funds should be kept in safe investments such as money market accounts, certificates of deposit or short-term bonds.

Bonds, issued by governments and companies, offer fixed returns. In contrast with stocks, which give the holder part ownership of a company, bonds are more like loans, made in this case to a company or government. Like other very conservative investments, bonds are attractive to investors who need to know that their money will be there when they need it. In exchange for this low level of risk, bondholders sacrifice the potential for higher returns found in stock investing.

Midterm: Getting aggressive

Midterm goals are those things you want to accomplish five to 15 years from now. They often include starting a family, buying a home or going to graduate school.

Although retirement is an excellent long-term goal and 401k plans are a great way to achieve it, such plans aren't the vehicle for anything other than retirement, Fisher warns.

Instead, if you want to buy a home in 10 years, you need to sit down now and figure out:

  • How much the house will cost.
  • What kind of down payment you will need to make.
  • How you much you will need to save and invest to get there.

Don't forget to factor in inflation, which we learned about in the previous article.[link to story No. 4] "It is amazing how few people put a plan like that together," Fisher says.

He says this sort of time frame calls for investments of mostly bonds and other forms of short-term fixed income, with no more than 50% of the money invested in stocks. This portfolio should be monitored closely and adjusted a few times each year to stay on track with your goals.

Let's say you'd like to settle down in 10 years and buy a house. You've shopped around your neighborhood and know that today you could buy a cozy bungalow for $300,000. When you're ready to buy, you'd like to contribute a down payment of 20%, or $60,000 in today's dollars. Adjusting for inflation at an average rate of 3.1%, that house will cost $409,000 in a decade. That means a 20% down payment becomes $81,800. Over the next 10 years you'd have to save $527 each month and invest the money at an average interest rate of 5% to reach that goal.

Long term: Matching risk and timeline

Long-term goals sit more than 15 years out on the horizon. One of the most common is retirement. But even if that Florida condo seems a million years away, you need to get to work now.

There are tax-delayed retirement savings plans both for those who are self-employed and for those who work for an employer. The most common such plans are 401k's, which allow you to allocate a portion of your paycheck, before taxes, to a retirement portfolio. The money is taxed only when you withdraw it in retirement. These and similar savings vehicles, such as individual retirement accounts, are a great way to start saving for retirement, since they decrease the taxes you have to pay today, while helping you build your wealth for the future. Further, many employers match a portion of employees' retirement contributions -- essentially free money that should not be ignored.

The allocation of funds for long-term goals depends on when you'll need the money. The longer you intend to wait, the more aggressive you can afford to be to start. Stocks tend to be the riskiest portfolio class, while cash and bonds are more reliable. That is why younger investors are usually advised to start their retirement savings with portfolios composed mostly of stocks, while older investors should have a more conservative mix of stocks and bonds. One rule of thumb is to subtract your age from 120 to determine the percentage of long-term assets that should be invested in stocks. Applying this rule, at 50, 70% of your money would be in stocks. But your risk tolerance will help guide your decisions in this area.

Many advisers are keen on target-date mutual funds, which automatically adjust risk downward as investors near retirement. A financial adviser managing your retirement can guide you through a similar transition for retirement and other long-term goals.

Rhonda and Ken Daniels had done little to plan for retirement, but today they are confident that they're on track to enjoy their later years in comfort. Rhonda, in her mid-30s, now invests $100 a month in a mutual fund through her employer's retirement plan and is on target to build that nest egg to $300,000 in 30 years. Combined with Social Security, Rhonda's pension and the disability payments Ken, in his early 50's, receives, the Danielses look forward to following their road map to wealth of their own planning.