Probably and a host of history classes. You can graduate from college speaking three languages and having a deep understanding of quantum physics but you know the one thing they never teach you in high school let alone never touch with a ten foot pole in College Financial lit asy. You can be an econ major and never learn how to balance a darned checkbook. Money is just not talked about in the education. Its like the third rail of the whole educational system. And thats why im on a Constant Mission to teach you every Aspect Imaging your money so youll becoming a better investor when it comes to retirement investing and your discretionary mad money portfolio. Which is a big reason i wrote get rich carefully to begin with. Most even if you dont own any individual tostocks directl you have a 401 k plan and thats why i want to talk about retirement. 401 k plans are the main way that americans save. Theyre among the great tax Deferred Investment vehicles out there along with the ira, not the irish republican army. But the individual retirement account. For those of you about to fall asleep or change the channel because the whole idea of saving for retirement puts you to sleep hear me out. Because you need to know this stuff. Ill tell you some things you wont hear from the so called experts. This show is different. At this point, its pretty much become conventional wisdom you have to invest in your 401 k that only an idiot would not. Some tell you to max it out, the maximum contribution is going up over time from 17,500 but either way thats a serious chunk of change. They come from your pretax income. However, im not one of those people who thinks you should max out of your 401 k . Im not someone who is going to sing the praises of the 401 k and tell you its the key to financial salvation because 401 k plans can be a real mixed bag. Boo with a couple of great features and a lot of bad ones too. The bad futures will eat away at your returns, sometimes through fees that are almost totally hidden from you that actually are quite upsetting to me. So let me lay out the good, the bad, and the ugly. Maybe put that cash in a better place, better use. First the good, the best thing about a 401 k its a tax Deferred Investment vehicle. You pay no taxes on what you put in and then you never pay a penny of Capital Gains profits which allows your money to compound, decade after decade. Totally tax free until you make withdraws. Regular viewers of this show and readers of my books know im a huge believer in the power of compounding. Suppose youre 30 years and you start to invest 5,000 a year and remember youre not paying any income tax on that. If you choose your investments wisely you should generate as much as a 7 return on average. Over 30 years youll be contributing 150,000 to your 401 k plan but because that compounds year after year without any Capital Gains taxes by the time youre 60, that pretax income well, that could be worth over 511,000. If you had to pay, thats on dividends and had to pay taxes on dividends it would be a lot lower. Thats how important compounding is. And avoiding the well, the tax deferred nature of the thing. You only ever have to pay taxes once. Thats when you decide to withdraw it. At that point, the taxes are ordinary income and youll be likely retired by then, youll be paying a lower rate than when you first earned it. So thats one major reason to like 401 k plans. The second, many but not all employers will match or partially match your 401 k contributions. In other words, for every thatter you invest for every dollar you invest, your employer may match. Never walk away from free money and especially when its untaxed. If you dont get free money from your employers i think its a much less compelling option. There are a lot of things about 401 k plans that can be really bad. Which is if you dont get a match from your employer i believe its better idea to save via the individual retirement account or ira which has the same tax favored status, you can only contribute 5,500 to your account, but when you change accounts you can roll it over to the ira and thats what you should do every time. Switching employers or finding yourself out of work. Why do i think the ira is better . First of all, 401 k lets you pick individual stocks but many more give you a 401 k plan with limited options. Sometimes you only get to choose between a dozen maybe a couple dozen mutual funds. So for those of you who cant pick your own stocks in your 401 k plan, before you contribute money to your 401 k plan, make sure it gives you an option to invest in something. You want a nice low expense index fund that mimics the s p 500. However, if your 401 k doesnt offer that shame on your company, go with a selfdirected ira. So you can have control over your money. One more negative. Within a 401 k when you invest in the mutual fund you have to pay that mutual funds fees. This is really important. But your 401 k administrator the company the people your employ year hires to run the plans they will also charge fees. Boo meaning that all of the money 401 k saves on taxes it can be clawed back by the fees. If you ever looked at your statement and wondered why your 401 k holdings arent increasing in value like they should be, fees are probably the reason. So where does all this leave us . Heres my bottom line. The company you work for offers an employer match, then you want to put money into your 401 k until that is matched up. Dont pass up on free money. Put any additional retirement saves into the ira. But if thats no employer match or if thats an employer match, but theres no options worth investing in, you would do better to skip the 401 k and go straight to the ira immediately. Deborah in california, deborah . Caller hi, jim. Thanks for taking my call. Quite welcome. Caller i have a twopart question regarding the value of listening to a companys earnings conference call. Okay. Caller the first part is, how can we decide what we want to do in other words what action we want to take based on the Earnings Report since the stock will behave in a contradictory to the report. They can guide lower on the revenue and earnings going forward. And the stock will go up. The second you might think that it should go down, right . The second part of my question is, im on the west coast. So the calls frequently are at 7 00 and 8 00 a. M. Eastern time so for me, the value of listening to the call is diminished because im not going to get up at 4 00 or 5 00 a. M. To listen to it. So i wont take any action on this. Well, heres the solution. You can listen at your leisure, im not trying to get anybody into a quarter to buy a stock ahead of a quarter if i can avoid it. What you want to do is take a longer term view in the comfort of you your home, without any noise, go listen to the call or read it, go to yahoo finance, get some of the research, match the expectations with what was said. Take a longer term view. Thats the advantage of the long term investor, you dont have to play that day. Doug in nevada. Doug . Caller booyah, mr. K. Okay. Caller yeah, my question is, i have 401, fairly substantial. Would it advisable for me to change that to a selfdirected ira . Okay, well, what matters is the match. If the employer is matching, no. You want to get the match you want to get the max match so to speak. And then after that, yes. Or but if its six or half and one half dozen of the other, the funds arent that good youre allowed to be in your 401 k then choose the selfdirected ira. Let me help you take control of your financial future. If your company matches your contribution in the 401 k , max that out. But if you dont get an employer match, you dont have investable options, go straight to the ira. You got your diploma, dont miss my advice for the vent grads. Too busy to invest in stocks, thats okay. Lets chart your course. Why dont you stick with cramer. Announcer dont miss a second of mad money. Follow jimcramer on twitter. Have a question . Tweet cramer, madtweets. Send jim an email to madmoney cnbc. Com or give us a call at 1800743cnbc. Miss something . Head to madmoney. Cnbc. Com. At ally bank no branches equals great rates. Its a fact. Kind of like mute buttons equal danger. That sound good . Not being on this phone call sounds good. Its not muted. Was that you jason . It was geoffrey it was jason. If everyone in this country went insane and decided to turn american into cramerica with me as your king, you better id be making some changes and changes pronto. Because this is about money ill stick to the finance shald elements. It drives me nuts we dont teach young people about money. Would it be crazy to take a class in personal finance before you graduate from high school . Like the Awkward Health classes that can get graphic at times. Now, sadly im nobodys dictator, i dont have any influence over the educational policy, but i do control what we attack about on the show. Can i speak some words that we all believe but very rarely get to say in conversation . Look, money is important. Its really important. And caring about the state of your finances does not make you some kind of superficial bourgeois monster. Lets say you have a lousy credit score and you want to get married, congratulations. You inflicted your horrible credit on the new spouse. Now you wont be able to buy a car or get a darn credit card, these things matter in life. They say money cant buy happiness, but i have found that conventional wisdom to be dubious at best, since being broke is indeed a major buzz kill as i know firsthand from the time i spent living in my 1978 ford fairmont. I sure wish i had an expert to guide me through this stuff way back then. Let me answer one of the most important questions out there, what the heck should young people do with their money . First and foremost and always, you need to invest. Thats the only way youll be able to achieve financial freedom. By freedom what i mean is living a life where youre not totally 100 dependent on your paycheck. Im always thrilled when i see members of the younger demographic who are taking an active hand in managing their open money. Some people start investing and saving way too late. But i also know many young people feel like they have all the time in the world, and there are Better Things for them to do stuff with their money so we have to drill down on this. Thats why ill give you three lesson and a caveat for those vent vently recently out of college. You need to pay off your Credit Card Debt. It is true for younger people, since Credit Card Companies have gotten really aggressive about offering credit to college students. No matter how much money you rack up in the stock market it will eat into your returns. Long term the interest is greater than the profits you can make. So pay your darn credit card balance in full every month. Automate it with your Credit Card Company if youre worri youll be tempted not to. I cant defeat that Credit Card Debt no matter how many great stock ideas. Now the three lessons. This is really for all of the young people who graduated and regardless of age and education level. You need to save money. But not everyone has an inherent predisposition to save. We cant be natural cheap skates. Just telling you to save over and over again wont do any good. However, the stock market is a great way to trick yourself into investing in stocks and that can be a lot of fun. We try that on the show. We try to do some entertainment within the teaching. Whereas leaving money in a savings account or a certificate of deposit feels kind of joyless for a lot of people. Not to mention that the returns are meaningless. Plus innio invest in the market, it will be a lot easier to resist the temptation to spend on things you dont need. Because it will be sitting in stocks that you like,. You have to sell your money to get the stocks back. Not only is this a terrific way to trick yourself into saving but also it has the added advantage of being the smartest place to put your money right now. Yes, traditional saving vehicles like money market fund, wow, you see the rates i check them every week. Cds, its waste to keep your savings in them when your cash can be making you more money by owning stocks in a brokerage account. Get your hands dirty with the money. This is a much more targeted piece of advice. While youre still young you can afford to take a lot more risk than say an old foe by like middle east. You can get away with riskier and stressful strategies and the potential upside can be huge or the potential downside. Play with options and being a lot more aggressive with your money. Why is that . Its not because young people are naturally better speculators, not at all. Its simply because when you make a mistake in your 20s with your money, you have your whole rest of your life to fix it. You can afford to buy more high risk stocks and end up losing your money when youre young because you have 40 odd years to earn back your losses so you have to take the risks. Older investors youve got to be more cautious. The closer you get to retirement the more conservative you have to be. More bonds and high yielding stocks, fewer trading in the single digits. If youre in your 20s you should invest like a young person, not an old person. Forget about bonds. Theres no reason for someone the in their 20s to have Bond Exposure when it can be invested in stocks when you can get a higher return year after year. I want you to take this advice to heart, because i suspect that the recent College Grads most likely to invest in the market are the ones who are the most responsible, the most prudent about the money. And prudence is great when putting together a budget to live with, within your means. Or deciding how much of your paycheck to save every month. Being too prudent is actually being reckless. 20 somethings, live a little. Take some risks. Play around with some speculative names. Maybe some tiny biotech companies, even with a lot of potential. Even if they blow up on you and go all the way to zero, you have your whole live to make that money back. Final lesson its never too early to start investing for retirement. Use your 401 k if your job has one and put the money in the roth ira. Heres the bottom line for young people out of college, investing is a great way to trick yourself into saving money. You might spend that money. Beyond that, remember when youre young, you can afford to take a lot more risk in your portfolio and never too soon to start contributing to your 401 k or ira. Especially if that ira is a roth. Lets go to mike in tennessee. Mike. Caller hey, jim. How you doing . I love your show. Thank you. Caller we watch it all the time. Thank you. Caller my question is, a few episodes ago you said you do not like buying a stock if the peg ratio is above 2. I wonder if you use that as a sell signal and if you do, how long do you let it go before you pull the trigger and sell the stock . When its more than two times the growth rate, i do get nervous. Now, there are some stocks that dont trade on earnings and you have to be careful. Like a bunch of cold stocks but the typical stock, you know, lower than two times that rate of growth, im fine with i. But it is a regular flag once it gets higher. A penny saved is a penny earned. Never too soon to contribute to your ira or 401 k . I have more on the pros and cons of index funds. Which way do i come out . And then income is a big factor, im going to point you in the right direction up. Plus, i wouldnt wish student debt on my worst enemy. Ill tell you how you can protect yourself and your family. Stick with cramer. I asked my dentist if an electric toothbrush was going to clean better than a manual. He said sure. But dont get just any one. Get one inspired by dentists. With a round brush head. Go pro with oralb. Oralbs rounded brush head cups your teeth to break up plaque, and rotates to sweep it away. And oralb delivers a clinically proven superior clean vs. Sonicare diamond clean. My mouth feels super clean. Oralb. Know youre getting a superior clean. Im never going back to a manual brush. We live in a world where you have more choices about where to invest your money than ever before. A virtual infinity of etfs, mutual fund, you name it. But more choice isnt always better. Sometimes having more options just makes it impossible to decide which ones are right and which are wrong for you. You never had more options when it comes to picking mutual funds like right now. Theyre everywhere. At this point there are so many different kinds of etfs it can make your head spin. I hate the way the way the sector based etfs the ones that allow you to buy and sell whole groups like banks and Home Builders i hate the way they warp the way that the stock market is trading. You can find out more in get rich carefully and if youre in them i have to urge you to find out about them. You have all kinds of etfs and mutual funds out there and they can advertise. They want your money. One of the biggest mistakes you can make as an individual investor is to give it to them. With the few significant exceptions. Unfortunately this is also one of the most common money mistakes out. There in fact, most people in the country equate investing with putting money in mutual funds. Some 80 Million People have exposure to mutual funds. Many of you dont have a choice. At will of 401 k plans dont let you pick individual stocks. They give you a menu of mutual funds to choose from, which is one major reason an individual retirement account or ira is a better way to invest for retirement for you. What exactly is so bad about most mutual funds . Why am i railing against something thats an institution in this country . Simple. If youre investing in mutual funds youre likely well to put it delicately, youre getting hosed. I dont want to paint with too broad of a brush here. There are worthwhile mutual funds and ill tell you how to find them in a minute. But first, you need to understand the problem with the mutual fund model. My main beef here is that with actively managed mutual fund, mutual funds where there are people deciding which stock or other securities to buy and sell we have some problems. Unlike hedge funds, Mutual Fund Managers dont get paid for delivering performance. They collect fees from their investor, people like you. And the amount of money they make depends entirely on the size of the assets under management. Aum we call it. The biggest incentive is not to do well, something that good performance can help with. But what theyre really being paid to do is bring in more money for more investors. Salespeople for the funds. Thats part of the reason why in study after study year over year its been shown that active live managed