Important one. There are some people, call them 1 if you will, who can make enough money from their ordinary daytoday income to become truly rich. What a great thing. But for the vast majority of americans, that paycheck is not enough. You need to augment it, work with it. And if you keep watching, im going to tell you how to do that, not just for the next year or two years but the rest of your life. Usually i come in here and tell you what i think of the markets, what themes are the best, stocks that fit those themes. But the truth is before you start investing in stocks there are a lot of other things you have to do if you want the payoff from those investments to mean something later in life. When you most need the money. You may not want to hear this, but its fruitless to think you can get rich in stocks if you havent laid down a foundation for building longterm wealth beforehand. What do i mean . Simple. You can make a fortune in the market but if youre hem regging money anywhere else, the healthy portfolio wont do much for you. At best it will keep you afloat when, if you planned things better it might have let you become wealthy. There are three absolute necessities. Three things that you must take care of before you consider owning stock. I dont address these subjects normally. I assume you have this stuff taking care of but sometime us feel like im being remiss in not mentioning them more often. We dont teach Financial Literacy in high school, very few colleges will teach you a thing about how to manage your finances. You might learn about English Literature or the theoretical foundations of marxism, that doesnt mean i cant offer a finance primer mad money style. Especially since i know from your phone calls and emails and twitter that you crave this education. You just ask for it every day. So im done ignoring it, ends tonight. What are the three things you must do before you can own stocks . I know this will sound boring and youve heard it a million times, sucks the life out of the fun of everything but i need to say it and you need to hear it. You have to, have to, have to pay off that Credit Card Debt. I like to be as entertaining as possible but i have to nag you on the subject. Im not one of those zealots that believes your credit cards should be cut into pieces and turned into a mosaic. Or that credit cards are evil and should be burned in effigy. But i acknowledge the facts and the facts are these. If you have Credit Card Debt you are paying an extraordinarily high Interest Rate on that debt to the credit card company. Were taking rates that may make a loan shark thats right, youre paying a loan shark. Now, it would make a loan shark blanch. The late great tony soprano would give you better terms. But the credit card industry wont break your kneecaps if you dont pay them back. [ rim shot ] but they will financially kneecap you with late fees that can destroy whatever you build up from your paycheck or other investments. Like many aspects of personal finance, i have a one time or another unfortunately brushed up against the down side of credit cards. In between college and law school i owed a huge amount of money to various creditors, just enough to make it so i had very little money left to live on. Initially because of some rotten luck and a bad break i ended up living in my car. I am inveterate saver, i managed to put a few bucks away into a retirement account i created investing with fidelity magellan fund. What books are good . One up on wall street remains the seminal text for understanding the market thats ever been penned. Its in amazon. But once i get a permanent address and knew where i was going to live, even though i was in hoc to a bunch of companies i owed money to before i started living in my 1978 ford fairmont, the credit card issuing Companies Found me and i took a bunch of them down. I pretty much everyone who offer med plastic. I always figured you can pay the minimum on each one and string everybody out. The credit issuers never seemed to mind. I remember i had four of them going each month, paying the minimum and i gotten a offer from a place in pr for for one more and i said what the heck, why not . But when i added up the minimum payments and charges once i took a that last card down i realized they amounted to my biggest expense after my rent. I wanted to default but feared the consequences. I restruck which ared my noncredit card dealt with a collection agency. These guys are like a posse. They found me soon after i skipped on them and their easier payment plan gave me just enough breathing room to get buy until i went back to law school where i got a scholarship with room and board. There i was able to get nice legal work from the great alan dershowitz, worked on the fabled claus von bulow trial and even though the hourly rate seemed huge to me, every penny went to those darn credit card companies. There was nothing left for me. In the end after school i got lucky, i landed a job in sales and trading at Goldman Sachs and paid off the bills rather quickly. What a relief. Because in the end i couldnt stomach opening the mail. Not everyone will be as fortunate as i was snagging a job that took me out of the credit card wilderness within several months ever work but i am realistic and know where of i speak when i say theres no way you can make enough money away from these card issuers to save in any meaningful way. Let me put it to you think way even if youre a credit investor, a one hundred million trader, it wont matter if youred with Credit Card Debt. Even if w good credit, youll be paying 15 and 23 your credit isnt so hot, 20 , 30 . If your stock portfolio racks up 20 , thats a darn good year. But if you have a big balance on your credit cards, pretty much all of your gains will be sucked down the drain by those surs you Interest Rates. This is a sine qua non of without not of investing. If you go into Credit Card Debt stocks will be a hoppy for you. Stocks cant be the wealth generate magazine they should be because the wealth they generate will be canceled out by the wealthdestroying powers of Credit Card Debt. [ buzzer sounding ] i know i sound like your parents but your parents are right. I said there are three things you need. The second is Health Insurance. You should not invest a penny in the market before you have Health Insurance. You might think the Affordable Care act makes this a nonissue but you have to buy Health Care Insurance or you pay a fine and industrial no Health Care Insurance. The penalties get bigger over time so there isnt any choice. Even if you object to obamacare politically, its idiotic to pay a fine and get nothing rather than pony up and at least get Health Insurance plus there are subsidies to make the cost more bearable if youre on the lower end of the income spectrum. Honestly, you shouldnt need legislation to make you get insurance. Medical emergencies are the single biggest cause of bankruptcy in this country. I know how people live without insurance because ive been there too when i was homeless. I had no Health Care Plan and had to drive hours to get to a farm workers clinic to see a doctor and i couldnt get the care i needed. I know you dont think it can happen to you and the younger demo in the audience can feel invulnerable but youre not and you dont want to be exposed to the down side financial risk of not owning Health Insurance. One illness, a couple hospital visit cans crush the capital you spent building for years. Sure you can get coverage if you have a preexisting condition but its a heck of a lot cheaper before you get sick. And youll need health care eventually at some point. Everybody does. Last but not least, you need Disability Insurance. The rationale for both Health Insurance and Disability Insurance is simple. Without these two kinds of insurances you can can wiped out in a second. All the precious gains youve wracked up will be for nothing because youll havetotouse the money to pay your hospital bills or support yourself while unemployed or injured because you didnt have health or Disability Insurance. In short, you have to pay off your Credit Card Debt and get health and Disability Insurance, the last two are offered with good prices by Many Employers so you have no excuse for not getting them if you also think you can afford to own stocks. These are more than just items on a personal finance to do list. They are essential elements in your strategy for capital preservation. Remember, we talk about Capital Appreciation when you grow your investments using money to make more money but we always acknowledge capital preservation comes first because you need that to protect your money in the present if you want to grow in the the future. Heres the bottom line paying off your Credit Card Debt and getting health and Disability Insurance are the three most important elements of capital preservation, without them, investing doesnt make sense. Why bother . With heavy Credit Card Debt and without health care and disability Building Wealth can be futile, even if youre one of the best investors in the world. So take care of these issues starting tomorrow then we can create the portfolio that makes the most sense for you. Zaidy in connecticut. Caller hey, jim. How are you . Earl a car caller i love your show. I quit my job two years ago, 57 years old and i have 400,000 in a 401 k that ive been trading myself in a small cap which i havent done recently. I had good returns now i dont know if i should roll it into an ira or do you like what enough your 401 k . We have a selfdirect brokerage, i was in fidelities fdi, i did well with that for a while. You should stick with it, youre in good shape. Just stick with it. I like what youve got. I think thats a good opportunity. Some people are really locked in. Mike in new york. Mike . Caller hey, mr. Cramer, how are you doing . All right, how are you . Caller im doing fine. I just have a question concern the city pensions. Ive been a retired Police Officer now for two years, ive been in the city Pension System for over 20. What is the difference between the 457 plan and a roth i. R. A. And what are the benefits or the pros and cons between the two plans . Im going to have to ask you to check with your people at your pension plan because the 457 deferred plan i am not quite sure how that works and im not going to be able to cuff something hereme. Its too important. Im very sorry but thats a personal decision to you and i dont feel comfortable offering advice on that particular situation. Before you can think about investing in stocks, make sure youre building a foundation for longterm wealth. Pay off your Credit Card Debt, get health and Disability Insurance then create a portfolio together. On mad money, you know i want you to be diversified and the same applies for your 401 k . Ill show you how to balance your retirement plan. Then, should you ever tinker with your contribution level . Dont miss my take. The 401 k isnt the only game in town. When it makes sense to add an ira to the mix. Mad money will be right back. Thank you for calling. Well be with you shortly. Yeah right. Xerox Predictive Analytics help companies provide a better and faster customer experience. Hello mr. Kent. Can i rebook your flight . Im here Customer Care can work better. With xerox. Wait im here mr. Kent . gasp shark diving xerox personalized employee portals help Companies Make benefits simple and accessible. From anywhere. Hula dancing . Cliff jumping Human Resources can work better. With xerox. Tonight were talking about a subject we dont spend enough time on in the business media, longterm wealth. If youre serious about getting rich and, more important, staying that way. I recommend you absolutely do a few things, go to amazon and buy the entire jim cramer catalog. And now that ive got that piece of selfpromotion out of the way, the second thing you should do to prepare for retirement, even if youre in your early 20s is youve got to start saving now. Notice i didnt say save for retirement, i said prepare. Because youre just stuffing your money in the First National bank of sealy, a. K. A. Stuffing into it your mattress, saving in the an i. R. A. Or 401 k , great though those two taxdeferr vehicles may be, they may not be enough to prepare for retirement. Really getting involved with your money, getting your hands dirty with the traditional vehicle, youll get next to nothing. And with that minimum reward, not worth the risk. And thats what im here to help you do. Young people, dont turn off the tv, you have to do this, too. Believe me, if theres anyone who can make the process sound interesting its me. You need to learn how the do this some time. Wouldnt you rather learn from a guy around for ages even though hes been moving around, highlights waste management, not to imagine the sound effects. I promise to give the you some useful advice that you cant find on the internet because so many of these pro mieds have been reneedmeepeated ad nauseam. You should save. Yes. But should you do an individual account i. R. A. . Yes, but thats not a bold insight, thats a fact. Yet people make careers out of saying use your array, use your 401 k , cut up your credit cards, spouting brilliant epiphanies like pay your bills on time. Great pieces of advice that everybody in america already knows and yet there are people who will still condescendingly tell you just those points and assume its enough to help you get ahead. I say its not. Basic financial responsibility is just a jumping off point like, hey, diet and exercise, please. Im the guy who tells you where to go from there because i didnt make a career out of giving people money advice. I made a career out of using money to make even more money and i came to this gig later in life. So how from the perspective of a money manager like me should you go about preparing for retirement . What useful advice can i give you beyond just that you should use your 401 k plan if you have one and your i. R. A. Which men can have because you dont pay taxes on the money you contribute and you dont pay taxes on the gains inside them, allowing for years after years of taxfree compounding. How about advice on what you should not do with your 401 k . The conventional wisdom says you should put money in but it leaves you on your own at the beginning of a complex and highly confusing process. What should you not do with your 401 k contributions . First and foremost, dont use much of your 401 k money to buy stock in the company you work for. Im far from the first person to say this, yes Company Stock is still the most popular 401 k investment out there. More people put the retirement dough into the stocks of their employer than any other investment. I cannot stress enough how misguided putting too much money in the stock of your company. Is it must be only one part of a much larger pie. Why . Let me put it in mad money terms. Every wednesday on this show we play am i diversified . You tell me your Top Five Holdings and i tell you if your portfolio is diversified meaning you have all five eggs in separate baskets with no Companies Part of the same sector. When it comes to investing, diversification, as i tell you in the first gospel according to cramer, jim cramers real money sane investing in an insane world, its the only free lunch out there. If you expose too much of your portfolio to the same sector you are running an enormous risk. Suppose you had all of your money in tech stocks before the dotcom collapse. Many people did. You would have been virtually wiped out. Something that soured an entire generation on investing for years. Or lets say the beginning of 2013, a little more current, your entire portfolio was in higher yielding dividend stocks. This is a cohort that had been performing well for years because bond yields were so low and yields kept going lower, bond prices kept going up which meant investors looking for income had no choice but to buy stocks with notoriously big dividends. In the spring of 2013 we had an Interest Rate scare. Interest rates rose violently. The return you can get from bonds increased dramatically and these highyelding stocks which is basically trading as bond alternatives got crushed because they had some real Interest Rate competition from the bond market. So if all of your portfolio or even onethird of it was made up of these high yielders, you lost a lot of money even though the first half of 2013 was fabulous as a whole. Thats the danger of not being diversified. Well get more Interest Rate you can see thes. Those of you in those stocks will get hurt again. Apply that logic to your 401 k . Do you want to invest your retime money in the same company paying your salary . That would mean youre putting your savings in the same basket as your paycheck. What if you worked for enron . How about the earlier iteration of Eastman Kodak for more recent less unsavory example. Or any other company that goes under. You lose your job, you lose your Retirement Savings. Its loselose. You think its conjecture, you know, i used to have