(MONEY Magazine) – What does wealth do for us? It allows us to buy stuff, of course, but even more it gives us the confidence and security and freedom to run our lives the way we would like. Wealth isn't about just dollars and cents--it's about being able to make the best choices for ourselves and our families.

So what about the process of building wealth? That too is about choices: what to spend, what to invest, what to save for a rainy day. There's no sense unreasonably denying yourself today for the sake of a far-off future--just as there's no sense mortgaging your future with profligacy today. A little planning, in other words, can go a long way.

That, in a nutshell, is what this package is all about. During the booming '90s, planning seemed almost unnecessary: Put money in the market and watch the wealth pile up. The past few years we've witnessed the opposite phenomenon, and folks can be forgiven for wanting to put their heads in the sand at times and say "I just won't think about it." But as the skies start to clear and we approach a new era of financial reality, it seems only prudent to assess precisely where we are on the wealth-building trail--as a country and as individuals. What tactics and practices show the most promise for building wealth over time--and what, in most cases, gets in the way of those actions? Much, it turns out, is under our control--and in our own heads. "The differences in wealth accumulation go beyond how you invest or windfalls such as receiving an inheritance," explains New York University professor Andrew Caplin, one of many wealth-building experts we interviewed extensively. "There appears to be a link," Caplin continues, "between the mental habits of monitoring your saving and spending and increased wealth."

To help you focus your own mental habits, we've developed a host of worksheets and benchmarks. We've also included profiles of people like you who are approaching wealth building in very different, though equally credible, ways. The point of this article is to use both history and persuasion to address the myths and realities surrounding wealth.

Take, for example, today's renewed focus on real estate. There is no question that real estate can be a terrific investment, and in the past two years rising home values have helped many Americans offset losses in their stock portfolios. Not surprisingly, many MONEY readers have told us that they are more intrigued than ever with the idea of relying on real estate as an investment. But, as wealth manager Harold Evensky says, "Home ownership is primarily a lifestyle decision--it's not a way to get rich." The reasons are not intuitive or obvious, which is why we've devoted an accompanying sidebar to the subject (see page 74). But the critical point is simple: Owning your own home is not the same thing as being a true real estate investor--someone who devotes time and money to fixing up properties and managing them. Successful real estate investing is more akin to running an entrepreneurial business--a key wealth driver we'll discuss in a moment.

What follows are the three main lessons about wealth building--which touch on stocks, entrepreneurship and income--as well as our wealth-assessment program. And lest you think the self-assessment is busywork, consider this: A new study by economists John Ameriks of the TIAA-CREF Institute and Andrew Caplin and John Leahy of New York University examined the differences in wealth between so-called high planners and low planners. High planners are those who devote "a great deal of time" to developing a financial plan, carefully research vacation trips and have strong math skills. On average, the high planners had a 19% greater net worth than low planners.

WHY STOCKS STILL MATTER

When you examine the typical asset breakdown of the wealthiest Americans--presented in the charts on page 70--one fact stands out: Overwhelmingly, categories such as stocks and business equity make up the greater part of net worth, some 40% to almost 80%. By contrast, for the less affluent middle class, the home is the largest single asset, amounting to nearly two-thirds of net worth. "Throughout most of the '80s and '90s," notes Edward Wolff, economics professor at New York University, "the wealthy have become even more wealthy in large part because they own the biggest percentage of equities." Indeed, Wolff has found that the wealthiest 10% of households own nearly 90% of the nation's financial assets.

Granted, stocks seem a lot more risky these days. The market has erased some $4.5 trillion in value since early 2000. And many forecasters have predicted that after the double-digit gains of the '90s, returns from stocks will be lower over the next few years--possibly less than their 10% historical annual average. Not surprisingly, fewer investors have been eager to pile into equities. In 2000, investors poured a record $300 billion into stock mutual funds; a year later, that flow dropped to just $32 billion.

Still, economic history convincingly demonstrates that stocks have been the best way to build wealth over the long run. For example, in a study using economic data from 1962 to 1995--an era that spans both a punishing bear market and a period of high inflation--Lisa Keister, associate sociology professor at Ohio State University, found that if you increased the middle class' likelihood of owning stock and the amount of stock they held by 15%, the group would have enjoyed aggregate wealth gains of 25% to 40%. "Over the long term," says Keister, "keeping more of your portfolio in stocks has been the best way to enhance net worth." And there's no reason to think that trend won't continue. Even in the boom and bust of the dotcom era of 1998 to 2001, some $280 billion in wealth was created by mutual funds, according to a proprietary study done for MONEY by Indiana University professor Charles Trzcinka and Ford Foundation researchers Lawrence Siegel and Timothy Aurthur.

THE BUSINESS-OWNER ADVANTAGE

It's long been an American tradition to start your own business to get rich. Among families with incomes of $100,000 or more, 35% own business equity, compared with just 11.5% of all families, according to Federal Reserve data. No surprise then that some half a million new businesses were launched annually in the '90s, according to the Small Business Administration. Still, becoming an entrepreneur is a gamble--more than half of businesses fail within the first five years. And in the aftermath of the dotcom crash, fewer Americans seem ready to take the plunge. Entrepreneurial activity dropped 30% last year, according to a recent study by the Kauffmann Foundation for Entrepreneurial Leadership and Babson College.

But if you are willing to take on the risk and stress--and to put in the hours and effort required--starting your own business can be lucrative. Kirsten Ritzau and Tom Harned, the Ketchum, Idaho couple featured on page 68, illustrate both the promise and the appeal of an entrepreneurial approach.

Ritzau, a realtor, and Harned, a sixth-grade teacher and former river-raft guide, have built up a net worth of $1.2 million by their early thirties, without giving up their day jobs. Instead, they have used favorable home-equity trends and tax-law advantages to launch a one-house-at-a-time real estate development business. They tap the equity in their house to help finance the purchase of a second property. Once they've lived in the first house long enough to qualify for a tax break ($500,000 of the gain on a home sale is tax-free for couples, as long as it's been their primary residence for two out of the previous five years), they sell and move to the second house. Then they start again.

The couple is now building a 4,600-square-foot, four-bedroom house overlooking Bald Mountain. When it's completed next spring, it will be Ritzau's fourth (and Harned's second) trade-up since 1993. While this strategy could have proved disastrous if real estate prices had tumbled, the opposite has happened, rewarding them for their risk and work. But Ritzau and Harned expect their next two-year residency to be their last trade-up for a while. When they sell that house, which they expect will fetch more than $3 million, they plan to trade down to a smaller one and use the proceeds to buy several income-producing properties and to bulk up their now $400,000 stock portfolio.

HIGH INCOME DOES NOT ENSURE WEALTH

During the late '90s, most families saw inflation-beating wage gains. Median household income grew at an annual rate of 2.5% between 1995 and 1999, according to the Census Bureau. As a group, higher-income Americans captured a disproportionate share of those gains--for example, the top 5% of wage earners saw their income grow at an annual rate of 3.5%. More Americans climbed into the six-figure-and-up salary range--the percentage of households earning $100,000 or more grew to 13.4% in 2000, up from 5.5% in 1980, after adjusting for inflation.

You might think that a six-figure salary is closely linked to serious wealth accumulation. Not necessarily. A lofty salary certainly helps you build wealth, but there's a surprisingly low correlation between a high income and a high net worth. "At all income levels, some families have accumulated wealth while others have meager portfolios," says economist Wolff.

For proof that you can build wealth even if you don't pull down six figures, consider Bobbi Powers, the Indiana high school teacher profiled on page 76. She has amassed a net worth of nearly $1 million simply by watching expenses, saving regularly, investing in stocks for the long term and minimizing debt.

One key reason for the disparity between income and net worth, according to economists, is saving and spending patterns. Many of us simply increase our spending in line with our pay raises. Or we sabotage ourselves with debt. Indeed, total household debt levels are at historic highs, according to Federal Reserve data. Even though the families that are shouldering the largest debt burdens are low-income and middle-class families, high earners are also letting debt take over more of their budgets. In 1989 debt payments averaged 8% of income for households earning more than $100,000; by 1998 that figure was 10%.

WHAT YOU CAN DO

Now it's time to assess your own finances and build a plan that can help you meet your goals. If that sounds like homework, keep this in mind: The planning premium, as we call it, tends to pay significant dividends.

Your starting point, as always, is not the average annual return of your portfolio or where you stand on the income ladder. Rather, begin by calculating your net worth, using the worksheet on page 73. This all-in-one wealth barometer is not perfect--it ignores future earnings as well as future obligations such as college costs--but it's the most useful snapshot of your wealth, and one that can help you measure your progress.

Along with the worksheet, we've included averages for the U.S. population, which you can use to assess your situation. If you find that you are doing better than your peers, congratulations--but don't let that lull you into a false sense of security. Similarly, if you're a bit behind the averages, don't let that get you down. There are bound to be brief setbacks along the way. For example, according to the market research firm Claritas, the median net worth of families earning $100,000 dropped 10% to $145,000 between 2000 and 2001, most likely because these high earners have a high portion of their assets in stocks. Still, that figure is significantly ahead of 1999's median net worth of $136,000.

The remaining data--from median income to typical 401(k) contributions--can help you identify where you are maximizing your wealth-building potential and where you may be falling short. If your spending levels are higher than the averages, there's no need to judge yourself harshly. We all set different priorities. The goal, though, is to be aware of the impact of our choices and make sure we're comfortable with the trade-off between enjoying today and building wealth for tomorrow.

Finally, whether you're on track to meet your wealth goals or are determined to play catch up, ask yourself the following three critical questions. Your answers, and how you act on them from here on, will go a long way toward determining your future affluence.

Is your portfolio properly diversified? Make sure you own both stocks and bonds and that your assets are spread among varied investing styles. And don't give up on asset groups that are lagging--eventually, out-of-favor styles rebound. "If you look beyond the overall losses in the market recently, some investing styles have performed quite well--and they were the ones everyone ignored a few years earlier," points out Ross Levin, a financial adviser in Edina, Minn. "Investors who kept some money in those assets did far better than those who didn't." For example, over the past two years, the long-neglected small value category has gained nearly 21% annually, according to Chicago investment research firm Morningstar, vs. a 12% loss for the S&P 500 index. And since January of this year, foreign small-stock funds, another little-noticed group, have soared nearly 12%, while the S&P is down 3.2%.

What's more, for younger investors a slumping market can be great news. "The worst thing for a young investor is a prolonged bull market, because you will be buying and reinvesting at high prices for many years," says investment adviser William Bernstein, author of The Four Pillars of Investing Wisdom. Remember, the name of the game is to buy low and sell high. Don't be dismayed by today's poor returns--stay confident and keep averaging into stocks.

Are you saving enough? For a quick ball-park estimate, look at the table on page 75 to see how much you need to save regularly to accumulate $1 million. Keep in mind, few families have enough cash to save for all their goals at the same time. So make retirement your first priority and max out on your 401(k) and IRAs--over the long term, these tax-deferred plans can be major wealth builders. As your income grows, you can target other goals such as buying a house or saving for your kids' college bills.

Are your debt and spending levels under control? If you decide that you need to clamp down on your spending, don't become obsessed with making a budget--few people can stick to one. Instead, says Sheryl Garrett, a financial adviser in Shawnee, Kans., first make sure you put money toward your long-term savings goals each month. Then, Garrett says, "before each expenditure, ask yourself, 'Is this purchase going to enhance my net worth?'" Once you're in that wealth-building mindset, you'll find that you spend less automatically.

Remember, in the end how well you're doing comes down to what you're doing. If you need more encouragement, consider this: Overall, the baby-boom generation has accumulated larger net worths--including their homes and financial assets--than their parents had at similar ages, according to another study by Ohio State's Keister. That's largely because baby boomers have been more active investors in the stock market than their parents were; boomers have also enjoyed unprecedented economic prosperity. "Assuming real wage growth, boomers will likely have more wealth than their parents in retirement," says Keister. "Many may even continue to accumulate wealth into retirement." The past few years have delivered a clear lesson on the way to build wealth: If you come up with a financial plan and stick with it, you'll end up ahead.