Learn how to invest your money wisely. Money just not talked about in education. Its like the third rail of the whole educational system. And thats why im on a Constant Mission to teach you about every aspect managing your money so youll be able to become a better investor both when it comes to retirement investing and what i call your discretionary mad money profile. Which is a big reason why i wrote get rich carefully to begin with. Even if you dont own individual stocks directly, you probably have some kind of exposure to the stock market. A 401 k plan where you keep the bulk of your retirement funds, which is i want to take a moment to talk about retirement. For those of you living in a cave 401 k plans are the main way americans save. Theyre offered by your employer and theyre among the great deferred tax investment vehicles out there, along with the i. R. A. Im talking about the individual requirement account. Wait. For those of you who are about channel because the whole idea of saving for retirement puts you to sleep, hear me out. Because you need to know this stuff. 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 even tell you to max out your 401 k if you make enough money for that to be feasible. The maximum contribution tends to be going up over time. 17,25, 18,000 in 2015. Thats a big chunk of change. They come from your pretax income. However, i am not one of the people who thinks you should max out your 401 k . Im not someone who is going to sing the praises of the 401 k and tell you its the key to your financial salvation. Because the truth is 401 k plans can be a real mixed bag. [ booing ] with a couple of really great features and a lot of bad ones too. Away at your returns year after year, sometimes in fees that are almost totally hidden from you that are actually quite upsetting to me. Let me lay out the good, the bad and the ugly of 401 k plans, and then ill tell you whether it makes sense to contribute more money to your own 401 k or put that cash to better use somewhere else. First the good. The best thing about a 401 k is its a tax Deferred Investment vehicle. You pay no taxes on what you put in. You never pay a penny of Capital Gains taxes on the profits you make in your 401 k which allows your money to compound year after year. Compounding just being fantastic. Decade after decade. Totally taxfree 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. Let me give you an example here. Suppose youre 30 years old and start investing 5,000 a year to your 401 k . Remember, youre not paying any income tax on that pretax income. If you choose your investments wisely, you should be able to generate perhaps as much as 7 return on average. Over the course of the next 30 150,000 to your 401 k plan. Because that money is able to compound year after year without any Capital Gains taxes, by the time youre 60, that 5,000 preyear tax income, that could be worth over 511,000. If you had to pay taxes on dividends and Capital Gains, it 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 have to pay taxes on your 401 k money once. Thats when you decide to withdraw it. Thats when taxes ordinary income and since youll likely be retired then, most of you will end up paying a lower rate than if you had been taxed on the higher rate levels. 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 dollar you invest in your 401 k plan, your employer might throw in 50 cents up to a certain point that is free money. To walk away from free money. Especially again, when its also untaxed. But if you dont get free money from your employer for contributing to a 401 k , i think its a much less compelling option, frankly. As i said before, there are a lot of things about a 401 k plan that can be really bad. Which is why if again you dont get a match from your employer, i believe its a better idea to save for retirement via the individual requirement account, or ira. The same exact tax deferred status as a 401 k . You can only contribute 5500 or 65 if youre over 50. When you change jobs, you can roll over all the money in your 401 k to an ira. Thats exactly what you should do every time you switch employers or find yourself out of work. Why do i think an ira is a better option . 401 k plans vary widely from company to company. Some give you terrific range of choices and even let you pick individual stocks. But 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 so for those of you who cant pick your own stocks this your 401 k , my number one rule is before you contribute money to your 401 k plan, you have to make sure it gives you the option to put your cash into something that is actually worth investing in. Ill make this very simple. You cant pick your own stocks in a 401 k , then you want a nice low expense index fund that mimics the s p 500. However, if your 401 k doesnt even offer that, shame on your company. Then go with the selfdirected ira from the full Service Discount program. I talk about fidelity so you can have control over your money. One more negative. Within a 401 k when you invest in a mutual fund you, have you to pay that mutual funds fees. This is really important. But your 401 k administrator, the company youre the people your employer hires to run these plans, they will also charge fees. [ booing ] meaning that all the money 401 k saves you on taxes, a great deal of that can actually be called back by these fees. You ever looked at your heck your 401 k holdings arent increasing in value like they should be, fees are probably the reason. So where does all this leave you . Here is my bottom line on retirement investing. The company you work for offers an employee match, you want to put money into your 401 k until that match is maxed out. No reason to pass up on free money. After that put any additional Retirement Savings into an ira. If there is no employer match or an employer match but your 401 k doesnt give you any options to invest, 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. Quite welcome. Caller i have a twopart question regarding the value of listening to a companys earnings conference calls. 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 report. For example, company can report good earnings, but guide lower on the revenue and earnings going forward, and the stock will go up. The second where you might think 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. To listen to it. So im not really going to take any action on that. Here is the solution to, this deborah. 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 you can avoid it. What you want to do is take a longer tomorrow view in the comfort of 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 individual investor. You dont have to play that day. Doug in nevada, doug . Caller booyah, mr. K. Okay. Caller yeah, my question is i have a 401 that is fairly substantial. Would it be advisable for me to change that to a selfdirected ira . Okay. Well, what matters is the match. If you have the employers is matching, no. You want to get the max match, so to speak. And after that, yes. But if its just six and a half or onehalf dozen of the other and the funds arent that good that youre allowed to be in your 401 k , then yes, i want you to choose the selfdirected when it comes to retirement, if your company matches the contribution to 401 k , max that out. Thats really important. But if you dont get a match, you dont have investful option, go straight to the ira. On mad tonight, you just got your diploma, so now what . Dont miss my Investment Advice for recent ads. Ill put your money behind the next best thing. Plus, there are many roads to a healthy retirement. Lets chart your coast. Stick with cramer. Dont miss a second of mad money. Follow jimcramer on twitter. Have a question . Tweet cramer, mad tweets. Send an email at cnbc. Com or give us a call at 1800743cnbc. Head to madmoney. Cnbc. Com. Im going to share a photo of my eggo waffle when it pops up. Thats so interesting honey because im going to share a photo of my eggo waffle when it pops up. 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A drop of dawn and grease is gone. Theres a more enjoyable way to get your fiber. Try phillips fiber good gummies plus energy support. And includes b vitamins to help convert food to energy. Mmmmm, these are good nice work, phillips the tasty side of fiber, from phillips. Booyah if everyone in this country american into cramerican with me as your king or grand poohbah, you Better Believe id be making changes and pronto. Because this is a show about money, im going to stick to financial element to the regime. It drives me nuts that we dont really teach our young people about how to handle money. And im talking early, too. Not just college. Would it be so crazy if you had to take a class in personal finance before you graduate from high school . I think it should be mandatory. Like the Awkward Health classes. Sadly, im nobodys dictator. I dont have any influence over educational policy. But i do control about what we talk about on the show. Can i take a moment to 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 really lousy credit score and you want to get married. Congratulations. Credit on your new spouse. Now neither you nor your partner will be able to qualify future a loan to buy a home or just get a darn credit card. They say Money Matters in life but thats the conventional wisdom at best since being broke is indeed a major buzz kill since 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 all this stuff way back then. So 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. 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 own money. That makes their lives a lot more difficult than they need to be. But i also know many young people feel like they have all the time in the world. Many more start investing before theyre truly ready when they are in fact Better Things for them to be doing stuff with their money. So we have to really drill down. This im going to give you three lessons, and a caveat for all those who are recently out of college. Lets start with the caveat. Before you can start investigating, you need to pay off your credit card debt. This is something i mentioned before. But its especially true for younger people, particularly 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, if youre carrying a balance on your credit cards, its going to eat into your returns. I know this myself firsthand. And longterm the interest on the credit cards will probably be greater than the profits you can make from investing. At least on a percentage basis. So just pay your darn credit card balance in full every month. Automate it with your credit card company. Youll be tempted not to. I cant defeat that credit card great stock ideas i have on the show. Three lessons for young investors. First, this is really for all young people who recently graduate and actually for everyone out there, regardless of age and edge indication level. You need the save money. But i recognize not everyone has an inherent predisposition to save. We cant all be natural cheapskates. And i acknowledge that telling you to save over and over again wont necessarily do any good. However, the stock market is a great way the trick yourself into saving a part of your paycheck that you might otherwise spend. Investing in stocks can actually be a lot of fun. We tried that on the show. We try to do some entertainment within the teaching, whereas leaving money in a savings account or sticking it in a deposit feels kind of joyless for a lot of people. Not to mention that the returns soso small that theyre yes, indeed, ill use the word meaningless. If you investigate your snaifgs 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. Youll have to sell the stocks to get your money become. Predilection to not sell once you buy. Not only is this a terrific way to trick yourself into saving, but also the added advantage of being the smartest place to put your money. Traditional saving vehicles like money market funds, wow you see the rates . Check them every week, cds, they give you hardly any return at all. Its a waste when the ash could be making you a lot more money by owning stocks in a brokerage account and working with your money. Get your hands dirty with your money. Second lesson for young investors, this is a much more targeted piece of advice. While youre still young, you can afford to take a lot more risk than an old fogy like myself. When your in your 20ious can get away with more reckless where the potential upside could be huge. But so is the potential downside. Or playing with options and generally 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 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 49 years to earn back your losses. So you have to take the risks. Older investors, you to be more cautious. The closer you get to retirement the more conservative your investing strategy has to be. More bonds, fewer speculative stocks trading in the single digits. If youre in your 20s, you should invest like a young person, not an old person. Forget about bonds there is no reason for someone in their 20s to have Bond Exposure when that money could be invested in stocks which will make you a higher return year after year. 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 that are the most responsible, the most prudent about their money. Are and prudence is great when putting together a budget to live within your means or deciding how much of your paycheck to save every month. Too prudent is actually being reckless. 20somethings, live a little, at least if your sock portfolio. Take some risks. Play around with some speculative names. Maybe 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 lesson for young investors, its never too early to start investing for retirement. Use your 401 k if your job has one. Especially put some money in a roth ira which is ideal for young investors. More on that later. For young people just out of college, investing is a great way to trick yourself into saving money you. Might otherwise spend that money. Beyond that, remember that when youre young, you can afford to take a lot more risks in your portfolio. And its 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, mike, 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 did not like buying a stock if the peg ratio is above 2. Right. Caller im wondering whether or not you use peg ratios as a sell signal . And if you do, how high will you let it go before you pull the trigger and sell it . More than two times the growth rate, i do get nervous. Now there are some stocks that dont trade on earnings. And youve got to be careful, like a cold stock there is a bunch of cold stocks. But the typical stock, if it trades for lower, great. Lower than two times at 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 your 401 k . I have a lot more tonight on this deep dive into the pros and cons of index funds. Hey, which way do i come out . Dont