This high school class should be mandatory, Anyone with a high school diploma has certainly taken a class on chemistry, physics and history.
But personal finance? Most students don't even come within 10 feet of it. Jim Cramer is sickened by the lack of financial literacy in the U.S.
What could be more important in education than planning for retirement or even learning to balance a checkbook?
Speaking of retirement, most investors probably have some sort of 401(k) plan where they keep the bulk of investments. That is why Cramer is going to start by going over the importance of tax-deferred retirement vehicles such as the 401(k) and IRA. And he's not referring to the Irish Republican Army—he means an individual retirement account.
If your company offers an employer match for 401(k) contributions, than it makes sense to load up as much free money you can get. However, if your employer doesn't match, or they do not have options worth investing in, then Cramer recommended skipping the 401(k) and going straight to the IRA.
First order, according to Professor Cramer? He would require everyone to take at least one personal finance class before graduation.
Too many people begin saving and investing too late, and many people think they have all the time in the world to start. That is why Cramer has crafted three lessons and a caveat for young investors.
First, the caveat; pay off your credit card debt. Then there are three tips Cramer gives to young investors: invest your savings, take investment risks and start saving for retirement.
Cramer's head is spinning with all of the options out there for mutual funds and exchange traded funds (ETFs). How the heck are investors supposed to know which ones to invest in when there are so many of them?
"The important thing is this: You have all sorts of ETFs and mutual funds out there, and they can all advertise. The companies that run these funds want your money. And of the biggest mistakes you can make as an individual investor is to give it to them, with a few significant exceptions," the "Mad Money" host said.
Why? Because these managers don't get paid for delivering performance, they collect a fee from investors regardless of the amount of money they make for their client. The amount of money they make depends on the size of assets that are under management. That means their biggest incentive is not for an investor to do well; it is how much of your money they can bring in.
To make matters worse; mutual funds also charge some of the highest fees in the business.
Cramer recommended that the best strategy is for an investor to manage their own portfolio of individual stocks. But for those who do not have the time or do not want to do so, Cramer has a few tips to invest in mutual funds.However, ultimately it does not matter how good an investor is at picking stocks; if they don't know what type of account to keep money in, then you could be costing yourself a ton of money in hidden fees.
This is why the "Mad Money" host has chosen to explain the difference between a regular 401(k) and individual retirement account (IRA), and whether it makes sense to use a Roth account.
Anyone can contribute to a Roth IRA, as long as they make less than $127,000 year. The difference between a regular IRA and a Roth IRA is when the tax is deducted for contributions.
Regular IRA contributions are taxed when you have retired and decide to withdraw the money. Roth IRA contributions are made with after-tax income. So once an investor's money is in the Roth IRA, they won't have to pay taxes on it again.
That means there is no capital gains tax or dividend tax, and when it is withdrawn after the age of 59 and a half, there is no income tax on that money.
The key to deciding whether to go with a typical 401(k) or either a Roth IRA or Roth 401(k) is to estimate the tax bracket you will be in when you retire. Does it make more sense to pay income tax now with a Roth, or wait and pay the income tax when you have retired with a regular account?
It's not just retirement that is an important factor for long-term investing. Cramer has read a lot of stories lately that talk about the growing burden of student loan debt for tens of thousands of Americans who owe more than a trillion dollars in debt.
"For any of you who are parents or are thinking about becoming parents, let me just tell you right now that there are very few things you can do for your children that are better than paying for as much of their college education as you can afford," the "Mad Money" host said.
Hands down, the best way to save for college is with a 529 savings plan. Rules vary by state, but there are certain aspects that are standard across the country.
Due to federal gift tax laws, single investors can only contribute $14,000 a year, or $28,000 if you're married and file taxes jointly. Grandparents can contribute to the plan, as well, and can even start at 529 plan with your child as the beneficiary, though Cramer thinks it is better for a parent to do it.
"The key here, though, is that you want to get that money into your kid's 529 as early as possible. That's because the greatness of these plans is all about the power of compounding," the "Mad Money" host added.
