Whole educational system. And thats why im on a Constant Mission to teach you about every aspect managing your money so you will be able to become a better investor both when it comes to retirement investing and playing out with what i call your discretionary mad money portfolio which is a big machine why i wrote get rich carefully to begin with. Most of you even if you dont own individual stocks directly you probably have some exposure to the stock market, 401 k plan where you keep the bulk of your Retirement Funds which is why i want to take a moment to about retirement. For those of you who have been living in a cave for the last 20 years 401 k plans are the way you save foe retirement. Wait. For those of you who are 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 im going to tell you some things that you wont hear from the socalled experts. This show is different. At this point its pretty much become conventional wisdom that you have to invest in your 401 k , that only an idiot would not contribute to a 401 k plan, a lot of experts will tell you to max out your 401 k if you make enough money for that to be feasible, the maximum contribution goes up over time from 17,500 to 18,000. Those come from your pretax income. I am not one of those things who thinks you should max out on your 401 k . I am not someone who is going to sing the braces of the 401 k because the truth is 401 k plans can be a real mixed bag. With a couple really great features and a lot of bad ones, too, and those bad futures will eat at way at your returns year after year sometimes through fees that are almost totally hidden from you that actually are quite upsetting to me. Ugly and i will tell you whether it makes sense for you to contribute more money to your own 401 k or maybe put that cash at a better place and better use somewhere else. First the good, its a tax Deferred Investment vehicle. Then you never pay a penny of Capital Gains taxes on the profits you make within your 401 k which allows your money to compound year after year, compounding big fantastic, totally tax free until you decide to start making withdrawals. Regular viewers of this show and readers of my books know im a huge believer in the power of compounding. Suppose youre 30 years old and you start investing 5,000 a year to your 401 k , you are not paying any income tax. If you choose your investments wisely you should be able to generate maybe perhaps as much as a 7 return on average. Over the course of the next 30 years you will be contributing 150,000 to your 401 k plan, because that money is able to compound year after year by the year pretax income, that could be worth over 511,000. If you had to pay taxes on dividends and Capital Gains, believe me, that number would be a lot lower, perhaps as much as 110,000 lower. Thats how important compounding is. And avoiding well, lets say the tax deferred nature of the thing. You only ever have to pay taxes on your 401 k money once, thats when you decide to withdraw it. Your withdraw taxes ordinary income and most of you will end up paying a lower rate than had you been taxed on that money you were getting those higher rate levels. Thats one major reason to like 401 k plan. The second many but not all employers will match or partially match your 401 k dollars. Your employer might throw in 50 cents up to a certain point. That is free money and you never want to walk away from free money especially when it is not taxed. If you dont get free money from much less compelling option. There are a lot of things about a 401 k plan that can be bad. Which is why if you dont get a match from your employer i believe its a better idea to save for retirement via the individual retirement account or ira, which has the same exact tax favored status of a 401 k . You can only contribute 5500 to your ira but when you change jobs you can roll over all your money from your 401 k into an ira and thats what you should do if you switch employers. Why do i think the ira is the better option . 401 k plans vary widely from company to company. Many more Companies Give you a 401 k plan with limited options. Sometimes you only get to choose between a dozen, maybe a couple dozen at most different mutual funds. For those of you who cant pick your own stocks in your 401 k my number one rule is before you plan you have to make sure it if i was you the option to put your cash into something thats actually worth investing in. I will make this simple. If you cant pick your own stocks in a 401 then you want a nice low expense index fund that mimics the s p 500. If your 401 k doesnt offer that go with a selfdirected ira from a full Service Discount company, im talking fidelity, so that you can have control over your money. Within a 401 k you have to pay that mutual funds fees, this is really important. But your 401 k administrator, the company the people your employer hires to runs these plans they will also charge fees. Meaning that all the money 401 k saves you on taxes a great deal can be clawed back by these fees. Have you ever wondered where your holdings arent increasing in value fees could be the reason. Here is my bottom line on the company you work for offers a employer match then you want to put money into that million that match is used up. After that put any additional Retirement Savings into an ira. If there is no employer match or there is an employer match but your 401 k doesnt give you any options worth investing in you would do better to skip the 401 k and go straight to an ira immediately. Deborah in california. Deborah. Caller hi, jim, thanks for taking my call. 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 frequently will behave in a contradictory fashion to the report . For example, a company can lower on the revenue and earnings Going Forward and the stock will go up. The second where 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. Right. Caller to listen to it. So im not going to really take any action on that. Here is the solution to this. You have no gun to your head unlike the hedge funds, 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 your home without any noise, go listen to the call lr read it, go to yahoo finance, get some of the research, street. Com, cnbc, get some research, match the expectations with what was said, take a longer term view. Thats the advantage of the have to play that day. Doug in nevada. Doug. Caller booyah, mr. K. Okay. Yeah, my question is i have a 401, fairly substantial. Would it be advisable for me to change that to a selfdirected ira . Okay. What matters is the match. If you have if the employer is matching, no. Okay. You want to get the max you want to get the max match, so to speak, and then after that, yes, or but if its just six and a half or one half dozen to the other and the funds arent that good that you are allowed to be in your 401 k then, yes, i want you to choose a selfdirected ira. Let me help you take control of your financial future. When it comes to retirement if your company matches your contribution to 401 k max that out, but if you dont get an the ira. On mad tonight you just got your diploma so now what . Dont miss my investing advice for recent College Grads. Too busy to invest in individual stocks i will help you put your money back to the next best thing. 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. Head to madmoney. Cnbc. Com. If everyone in this country went insane and decided to turn american into cramerican with me as your king you Better Believe id be making changes and changes front toe, but because this is a show about money im going to stick to the financial elements because the fact is it drives me nuts that we dont teach our young people about how to handle money. Would it be so crazy if you had taken a place in personal finance before you graduate from high school. I think that should be like our Awkward Health classes. Sadly i am nobodys dictator and i dont have any influence over educational policy in this country but i do control what we talk about on this show. Can i take a moment to speak words we all believe but rarely get to say in conversation . Look, money is important. Its really important. And caring about the state of your finances does knots make u some kind of superficial bourgeois monster. Lets say you have a lousy credit score and want to get married. You have just inflicted your horrible credit on your new spouse. Neither you nor your partner will be able to qualify for a loan to buy a car or home or even perhaps get a darn credit card. These things matter in life. They say money cant buy happiness but ive only found that piece of cliche conventional wisdom to be bious at best since being broke is a major buzz kill since i know firsthand from the time i fairmont. I sure wish i had an expert to guide me through all of 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 youre going to be able to achieve Financial Freedom and by freedom what i mean is living a life where you are 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 own money. Too many people start saving and investing way too late. I also know many young people feel like they have all the time in the world, many more start investing before they are truly ready when they are, in fact, Better Things for them to be doing stuff with their money so we have to drill down on this. Im going to give you three lessons and a caveat for all of those who are recently out of college. You need to pay off your Credit Card Debt. This is something ive mentioned before but its especially true for younger people. Credit Card Companies have gotten aggressive about offering credit to college students, no matter how much money you rack up in the stock market if youre carrying a balance on your credit card its going to eat into your returns and longterm the interest on those credit cards will probably be greater than the profits you can make from investing at least on a percentage basis. Just pay your darn credit card balance in full every month, automate it with your credit card company. You will be tempted not to, i cant defeat that Credit Card Debt no matter how great stock ideas i have on the shown. This is really for all young people who have recently graduated and actually for everyone out there. You need to save money but i recognize that not everyone has an inherent predisposition to save, we cant all be natural cheap skates and i acknowledge telling you to save over and over again wont necessarily do any good, however, the stock yourself into saving a part of your paycheck that you might otherwise spend. Investing in stocks can be a lot of fun. We try to do some entertainment within the teaching whereas leaving money in a savings account or certificate of deposit just feels like kind of joyless for a lot of people not to mention the fact that the returns are so small that they are basically, yes, indeed, i will use the word meaningless. Plus if you invest your savings in the market it will be a lot easier to resist the temptation to spend that money on things that you might not need because it will be sitting in stocks that you like, you will have to sell those stocks to get your predilection to not sell once you buy. Not only is this a terrific way to trick yourself into saving but its the smartest place to put your money. Traditional savings vehicles like money market funds, you see those rates, i check them every week, cds, they give you hardly any return at all. Its a waste to keep your savings in them when that cash can make you more money by stocks and working with your money. Second lesson for one investing, this is a much more targeted piece of advice, while you are still young you can afford to take a lot more risk than an old fogey like myself. When you are in your 20s you can get away with reckless strategies. Or playing with options and just generally being a lot more aggressive with your money. Why is that . Its not because young people are naturally better speculators, 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 nor high risk stocks and end up losing your money when you are young because you have 40odd years to earn back your losses so you have to take those risks. Older investors you have to be more cautious. The closer you get to retirement the more conservative your investing strategy should be, more bonds, but if you are in your 20s you should invest like person. Forget about bonds, people, please, there is no reason for someone in their 20s to have Bond Exposure when that money could be invested in stocks. Young people i want you to take this advice to heart especially because i suspect that the recent College Grads most likely to invest in the market are also the ones who are in the most responsible, the most prudent about their money. And prudence is great when youre putting together a budget to live with within your means or deciding how much of your paycheck to save every month but for young investors being too prudent is actually being reckless. 20 somethings, live a little, at least in your stock portfolios, stick some risks, play around with speculative names, maybe tiny Biotech Companies with a lot of potential. Even if they blow up on you and go all the way to zero youve got your whole life to make that money back. Final levin, its never too early to start investing for retirement. In a roth ira. Here is the bottom line, for young people just out of College Investing is a great way to trick yourself no saving money, you might otherwise spend that money. Beyond that remember when you are young you can afford to take a lot more risks with your portfolio and its never too soon to start contributing to your 401 k or ira, especially with that ira is a roth. Lets go to mike in tennessee. Caller hey, jim, how are you doing . Love your show. Thank you. Time. Thank you. Caller my question is a few episodes ago you said that you did not like buying a stock if the peg ratio got above 2. Right. Caller im wondering wrong you use peg ratios as a sell signal and if you do how high will you let it go before you pull the trigger . When its more two times the growth rate i do get nervous. There are some stocks that dont to be careful like a cold stock, but the pical stock if it trades for lower, you know, great lower than two times that rate of growth im fine with it, but it is a red flag once it gets higher. A penny saved is a penny earned. Investing is a great way to trick yourself into saving money, its never too soon to contribute to your ira or 401 k . I have a lot more tonight on this deep dive into the pros and cons of index funds. Which way could i come out . Dont miss my take. Income is a big factor in choosing retirement path. Plus i wouldnt wish Student Loan Debt on my worst enemy. I will help you protect your family from this expensive dont go away, stay with cramer. Olay regenerist renews from within, plumping surface cells for a dramatic transformation without the need for fillers your skin never will. Olay regenerist. We live in a world where you have more choices about where to im vest your money than ever before. A virtual infinity of etfs, mutual funds, 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 ones are wrong for you. You have never had more options when it comes to Picking Exchange traded funds and mutual funds than you do right now, theyre everywhere. At this point theres so many different kinds of etfs that it can make your head spin. As a side note i hate how many of the sectorbased etfs, the ones that let you buy and sell an entire group like the banks, home builders, i hate the way whole stock market trades, thats something you can find out more about in get rich carefully. If you are in these etfs i have to urge you to find out about them. You have all sorts of etfs and mutual funds out there and they can all advertise, the companies that run these funds they want your money and one of the biggest mistakes you can make as an individual investor is to give it to them with a few significant exceptions. Unfortunately this is also one of the most common money mistakes out there, in fact, most people in this company equate investing with putting their money in mutual funds, 80 Million People have exposure to mutual funds, many of you dont have a choice, a lot of 401 k plans dont let you pick individual stocks, they give you a menu of mutual funds to choose from which is why i think all things being equal an ira is a better way to invest for retirement for you. What is to bad about most mutual simple. If youre investing in mutual funds youre most likely delicately getting hosed. Now, i dont want to paint with too broad a brush here. There are some worthwhile mutual funds and i will tell you how to find them in a minute. The problem with the mutual fund model. My main beef is that with actively managed mutual funds, mutual funds where there are people deciding which stocks or other securities to buy or sell we have some problems. Unlike hedge funds Mutual Fund Managers dont get paid for delivering performance, they collect fees from their investors, people like you and the amount of money