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NEW YORK (TheStreet) -- America's education system teaches a lot of important things, Jim Cramer told his Mad Money TV show viewers Monday, but one thing it doesn't teach is financial literacy. That's why Cramer dedicated his entire show to giving investors another peek into his playbook for successful investing.
Cramer's first lesson: the do's and don'ts of your 401(k). It's pretty much conventional wisdom, Cramer said, that if your employer offers a 401(k) plan, you should invest in it, and if possible, max out your contributions at the current limit of $17,500 a year. But Cramer said he's not one of those "conventional" thinkers, as 401(k)s have both good features and some pretty bad ones.
On the plus side, 401(k)s are tax-deferred vehicles, which means you don't pay taxes on the money you put in, or on the capital gains you make. That means if a 30-year old invests $5,000 a year for 30 years and gets a modest return of 7% a year, the $150,000 investment will be worth $511,000 at retirement. Since your tax rate will be lower during retirement, paying taxes later makes a lot of sense.Also in the plus column, 401(k)s sometimes have employer-matched funds, which is essentially free money, also provided tax free.
Ditch the DebtCramer's next lesson for investors was aimed at young people, those just graduating college and starting their careers. He explained that first, money is important, and is something to which everyone needs to pay attention. A lousy credit score may not seem like a big deal, but try to get a loan or buy a home or even secure a credit card and you'll quickly see that money matters. Investing is the only way to financial freedom, Cramer continued. But before young people invest anything, they need to first get rid of their credit card debt. No matter what your gains in the markets, the high interest rates of your credit cards will quickly overwhelm them, Cramer said, so a young person's first goal should always be to get debt-free. After becoming debt free, Cramer said young investors need to get in the habit of saving. Saving may seem boring, he said, and it is if you invest in a savings account or bank CD. But if you invest in stocks, you'll be more engaged, you'll follow the news and actually see your investments grow. Investing in stocks can actually be fun, Cramer noted, and that makes wanting to save a lot easier. Younger investors need to also heed two more bits of advice, Cramer said: Start early and take more risks. It's never too early to start investing and young people can afford to speculate and take more risks, getting more conservative as they get older.
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