Jim Cramer's 'Mad Money' Recap: Here Are My ABCs of Financial Literacy
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NEW YORK ( TheStreet) -- America's education system teaches us a lot of important things but not financial literacy, Jim Cramer said on Mad Money . That's why Cramer dedicated tonight's 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 conventional wisdom 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 $18,000 a year, Cramer said. However, he is not one of those "conventional" thinkers because 401(k)s have 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 the 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. But many 401(k)s also severely limit your investment choices, Cramer said, and many of the options include high fees from the few mutual funds they offer as well as fees from the 401(k) plan administrator. That's why Cramer only recommends 401(k) plans if they have an employer match. Once the match is met, he prefers investing in individually run IRA accounts where investors are in complete control and can pick individual stocks.
Pay Your DebtsCramer's next lesson for investors is aimed at young people, those just graduating college and starting their careers. He explained that first, money is important, and is something everyone needs to pay attention to. 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 just how much money matters. Must Read: 10 Stocks Billionaire David Einhorn Loves for 2015
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