Not just investing, but every aspect of your financial life. And sometimes that means we need to take a deep breath, step back from the daytoday nittygritty of the market and no cuss on the educational side of things what i call investing 101 honestly, if any university was ever crazy enough to give me tenure, i could teach an entire semesters worth of classes on just the basics. But, of course that, presupposes that any institution of Higher Education here in america would be interested in teaching how to manage your money. A topic thats a little quintinian for the ivory tower types that run most colleges, you can get a bachelors degree in economics without knowing how to balance a checkbook. Thats not going to change, but we can do our best here on mad money to help. So investing 101. Whats the first item on my sill syllabus of the class . We need to thank you about savings. If you dont save, you will spend the rest of your life to a slave to your paycheck or the hostage to the Social Security system. For throws in your twentsz, who knows if Social Security will be around by the time you need it. More importantly, i cant teach you how to invest your money if you dont have money to invest. Thats why its really crucial that you save and save consistently. Look, im not going to tell you all the reasons that make sense to tav i save money. You dont need one more person badgering about the obvious, whether its to buy a house or you can retire or more than Social Security. Which you will need more than. Trust me. For most of you, when you hit retirement, Social Security, its not going to be enough. Plus, Social Security will be altered or taken away by washington, which makes it inherently unreliable. It wasnt so long ago the president and congress were willing to change the way Social Security keeps up with inflation. Something that would have meant serious cuts in benefits for those of you expecting to collect them 20 to 30 years from now. These changes didnt actually happen. Nobody in washington can agree on anything, anyway. But if things ever get more amicable in the capital, kind of like a oneparty thing going, you should be prepared for them to tinker with your Social Security. I have to tell you, i dont think it will be in a good way. Thats all the nagging i will do today. Honestly, from my perspective, the best reason to save is not that i will insure you have to insist on cat food in your old age . No the real reason to save money, a reason is that for the vast majority of people in this country, you are never going to get rich from your paycheck alone. Look, thats just a fact. For everybody whos worried about income and equality or the growing lack of social mobility out there, there is not much you can do to fix our system of playing stage capitalism on your own, but there are still ways you could help yourself. Mainly, you can increase your wealth pretty dramatically by saving part of your paycheck and investing that money in stocks as long as you invest it wisely. Thats my reasoning. If you dont save or save enough, then you are at best a hostage to your paycheck and your boss and if you are living paycheck to paycheck, you dont have the prospect of quitting your job. Your 18 p only options action are to keep doing something that makes you miserable or go broke and possibly lose everything, including your home, which is even more miserable as i can tell you from my personal experience. Trust me the back seat of your car is a lousy place to live. So on confessions of a street addict, i dont need to go over it anymore. But you can see, i know where i speak. However, if you save and invest your money, yeartoyear, if you grow your assets and for those of you in the dark about how to do that, i suggest you pick up a copy of get rich carefully, then eventually you will have real independence. You wont be hostage to anybody. It may not be fair, but we live in a world where wealth is synonymous with freedom. Its pretty darn good reason to save 15 of your pay clek if you can afford to or at least 10 if you are really strapped for cash. Once you start saving money, though, you have to know where to put it. Thats an issue we dont spend a lot of time talking about on mad money. Lets say you are saving 15 of your income, where should you invest that cash in thats optimal. How much should go into a tax retirement account loik a 401k or regular brokerage account. These are the questions i get all the time. My rule of thumb here is to invest for retirement first. Because to best against retirement is to bet against your own longevity. For those of you who are decades away from retirement age, i recommend putting half to twothirds of your savings into retirement accounts like a 401k or individual retirement account. Remember, these are tax favored vehicles. Meaning you dont pay any taxes on your accounts or profits within the account. You only pay taxes once you decide to withdraw the money after you are retired, at which point you withdraw it as ordinary income. I told you about how to use these accounts before. So i will not belabor the point. Half or twothirds of your savings should go into retirement. The rest of your money goes into a mad money account. Thats a normal brokerage. I recommend a low commission. There are two reasons why you should have parallel accounts like this. The first simply is to rise 401k means your money gets all special tax savings. You can take advantage with money you intend to spend before retirement, unless you use a roth ira. In the case of a roth, your contributions are tax going in. Well you are allowed to withdraw those contributions early without penalty, you still get hit for a penalty for withdrawing any of your profits early. If you dont feel you have enough capital by keeping two separate accounts, then a roth ira is a good way to square that circle. Especially since the roth is more favorable to younger people with lower incomes than a regular ira. There is a second reason i recommend using two different portfolios, though. You are supposed to take fewer risks with your retirement money. Can you tike i take more risks with your discretionary mad money portfolio. When you are young, there is much less difference. If are you the age of 30 you can afford to take risks with all your money because as i tell you all the time, have you your whole life ahead of you to make back any income losses. Hallelujah heres the bottom line. Dont think of saving money as the responsible way to make sure you have a comfortable future. No. Think about savings as an investment for the stockmarket. Investors done correctly to free you from the shackles of your paycheck and maybe make you, especially rich. Thats why you should have a retirement portfolio to make sure you have enough money once you stop working. You should also have a discretionary portfolio where you can take more risks and use your gain to have some fun before you turn 65. Debra in california. Debra caller hi, jim, thanks, so much for the show. Love it of course, thank you so much. Caller my question is, i frequently hear you and other analysts say to buy a stock on a pullback. Right. Caller but nobody ever says how to determine hutch of a pullback we should be looking for. So how do i determine how far it has to pull back . Okay. This is a great question. I have an answer. I always say its a fiveday percent from the 52week high is where i would start buying. Thats what i have been doing for my charitable trust. I dont like to get started before then because i dont want to rick that the next move down will force my hand. Five day percent and atlanta little bit off room rather than two to 3 down. 5to8 is my rule. Alan in new york. Alan. Caller booyah, professor cramer. Thank you so much for that degree. How can i help you . Caller hi. I know that you always say that when you are ahead you should take some profits off the table. When you have profit on Core Holdings that still have big upside, you keep or sell on investing Something Else. My goal sense i started investing, my first trade in 1978 is to play with the houses money. Take your time scaling out of a core holding. You can tap it as a franchise player. But when you have a double, i need some money to come off him when you have another double you need money to come off t. Goal is to play with the houses money and never touch it again. Because you just cant lose. That itself the way it should be played. Trust me, thats how its done. Debbie in id hodaho. Keb by. Caller he, jim, we have been getting a financial presentation that usually includes a free consultation. While we have been successful at accumulating money in our 401ks over the years with the emphasis of somebody we trust. We have moved and we are considering a change. Soar with now getting close to 60yearsold and are looking for a different plan, one that includes income distribution, Social Security maximization and tax savings. So what should we look for in a financial or an ad advisor at this stage of our life . Okay. You have got to get invested in your community. A civic activity, a ymca, which i support. You know, some organization locally and then get some feedback. I demand that people have some sort of contact with friends who use these people. Because referrals are the only way to be sure. Not advertising. Not seminars. But referrals. Okay. A penny saved is a penny earned. Think about your savings as fuel for your investments. You dont have to be held hostage to your paycheck and mad money will be right back. Now, on mad tonight, how many is too many . Find out how many stocks you should own and ill show you how to master the art of diversification. Then whats the stock really worth . Ill show you how to figure it out. How much lesser cash you should carry around in your portfolio. Why dont you stick with cramer . Zplmplts while every business is unique, everyone is looking for ways to cut expenses. And thats where pg es Online BusinessEnergy Checkup tool can really help. You can use it to track your Actual Energy use. Find rebates that make equipment upgrades more affordable. Even develop a Customized Energy plan for your company. Think of it as a way to take more control over your operating costs. And yet another Energy Saving opportunity from pg e. Find new ways to save energy and money with pg es Business Energy checkup. [is the staying awake part. T challeng gun shot your day sleep train has your ticket to a better nights sleep. Because when brands compete, you save. Through sunday, during mattress price wars, save up to 400 on beautyrest and posturepedic. Get interestfree financing until 2018 on tempurpedic. Plus, helpful advice from the sleep experts. But mattress price wars ends sunday at sleep train. Sleep train your ticket to a better nights sleep. I kicked off the show by telling you you should save 15 of your paycheck, 18 and split it before a more conservative retirement portfolio using a 401k or ira and using a discretionary money portfolio that you can manage out of a regular brokerage account. Beyond dividing your savings into two streams. How do you get involved in the stockmarket . Where do you begin . My short answer. This will sound glib. Buy a copy of get rich quickly i wrote that book to teach you how to invest in this not so brave few world. How about the longer answer, though . Less emotional. For starters, i believe a diversified portfolio of five to ten individual stocks is the best way to go. Remember you can do the index. Now im talking about the other part. All right. Before you start picking stocks, you into ed to forget everything i ever heard about that classic piece of socalled investing wisdom and buy and hold. You dont buy and hold on mad money. Thats reckless. Its a great way to lose your shirt. Instead we practice buying and doing homework. That means if you pick individual stocks, you will read a companys sec filings for the annual report. I do love t. 10k most recent quarter the conference calls, you have to do all of that. The most important element of the home is going over the earnings reports and not just the earnings release. You actually do have to read the transcripts of these calls. Theyre so readily available. Theyre everywhere on the web. There is no better source than information on these calls. Now its incredibly easy to listen to them online. You have to research the companys sector. Try to physical out if there is a good, if its a good moment in the Business Cycle to own things in the particular industry you are looking at. Then compare the stock to its competitors to see if its valuation makes sense or Something Else is a more attractive buy in that exact same sector. If are you not willing to put in at least that much work, nope, i dont want you to do it. I want you to stay away from owning individual stocks. This is jim cramer saying it. Mr. Stock is telling you, i dont want you to touch stocks. The fact is, investsing like Everything Else in life takes effort few want to do a good job. But im not trying to guilt trip you into spending more time doing your homework. A know a lot of people that dont have the timer incriminalation to do the individual Stock Research i believe is so central. If you are one of those people that lacks the time or the interest, dont try to wing it. Ill give you a Good Alternative in a second. I have been meaning to diversify a portfolio, you need 10 million. Until you have that much saved up, there is not much point in going into individual stocks. So where should you invest your money if you dont have 10,000 to invest or dont have the time to machine a portfolio but lease five stocks, in that case, put your money in an index fund. Yes, im endorsing index funds. Mr. Stock is endorsing mr. Index. If you want a cheap index funds that mirror the s p 500. You will have the asset class over the long term. Thats demonstrative and empirical t. Whole thing is the index fund is the market. So few put your money in a fund that mirrors the s p 500, will you have the same benchmark performance the performance exactly like what the s p gives you minus what fee us you pay to the funds administrator. Picking your best stock is the best option. For those who cant commit to stock picking for whatever reason, keeping your money in an index fund, that is a perfectly reasonable responsible way to go. I happen to like the vanguard 500 index fund. Very little fees in that one. However, if you do have the time and inclination to own individual stock the first step is to build yourself a diversified portfolio that i mentioned earlier. Now, im always getting questions of what constitutes diversified portfolio and what you should put in it. Let me spell things out for you. Diversification is simple. People tend to forget about it. We play am i diversified every week here on the show. In a nut shell, you would have no more than 20 of your portfolio is in the same sector. Diversification is all important because if something happens that questions one particular group of stock, you dont want it to inviscerate your entire portfolio. I seen too many people put too many eggs in one basket. When it broke, they lost everything. 2009 with the banks, those juicy yields people couldnt resist. Dont repeat that mistake. If you are building a di firstified portfolio, you need a minimum of five stocks. On the other hand, my raw thumb is you dont want to own more than ten stocks, then you will have to do way too much homework to keep up with all them w. More than ten stocks, you will practically be owning your own mutual fund. That will be hard on anyone, even the desire of an illusion of a personal life. First, you might want a tech Company Riding the triple wave of social. And second maybe you own a Pipeline Company as a way to play the tremendous surge if domestic gas. Third, perhaps a health care name, either a biotech celgene and a Big Pharma Company with the risk, bristolmyers, fourth, why not a retail. Fifth, lets round out with an entertainment cap energy, retail, entertainment. Thats what a diversified portfolio looks like, if are you Getting Started as an individual investor. Remember to own individual stocks, you need to do homework on each. You have a state of di firstified. Get your money spread out among at least five sectors. There is much more mad money ahead. Including the many factors that determine a stocks price tag, the actual what you pay that dollar amount. I will help you understand what a holding is really worth then solving the cash ka fun drum. How much should you hold in your portfolio . Dont miss my take. Plus everyone should pay their taxes, but are you giving the government too much of your money . Ill help you keep whats yours. Stick with cramer. Jim cramer, you are one of my heroes. I look forward to your sew every week night. Thank you for helping beginning investors like me. When you talk about the markets, i believe are you spot on. Oh i love it. Thank you so much. Every night we watch you i have learned and earned. Why am i taking a step back tonight to focus on the basics of investing 101 . Because with very few exceptions nobody tries to teach this stuff. Nobody at all. You can get a graduate degree without reaching your bank statement. I got to tell you, its driving me nuts. And thats why im trying to teach, well, thats why i teach you how to handle your finances and the basics of investing the stuff we gloss over in our never ending quest to find you the next bull market. Obviously, thats what mad money is about. Sometimes we got to step back and do it right to get you grounded. So we talked about what . Setting something aside for retirement. We talked about home workd and diversification. Now, lets talk about something we dont talk about enough at all. Really, because its hard and sometimes boring, but im going to make it exciting for you. Lets talk valuation. When you are picking stocks to fill out your portfolio, how do you talk what is keep . Oh, that itself cheap stuff. Whoa, thats expensive stuff . How do you compare stocks on an apples to apples basis . As i told you over and over again, you never judge a stock by the average dollar price. Its meaningless, you judge it by the multiple or pe. Think about it, the stock is in a thousand dollars, is that necessarily what it is at 500 . No. Anyway, valuations is a concept i use all the time to show you how we value stocks. T