Every once in a while, Jim Cramer likes to take a step back and takes a look at the big picture of how we create sustainable wealth. However, building that wealth can result in a lot of mistakes.
Cramer aims to help investors avoid these mistakes by providing wealth-building secrets that can be utilized today and making sure there's money available when you really need it down the road.
The reality is that owning stocks, which can be very profitable, is really just one step in the wealth-building process.
"There are some people, call them the 1 percent if you will, who can make enough money from their ordinary, day-to-day income to become truly rich. But for the vast majority of Americans, that paycheck is simply not enough," Cramer said.
That means owning stocks is just one piece of the puzzle. To start, Cramer pointed out that you must have capital preservation. Meaning, your goal is to save money and prevent loss. Don't even bother investing in stocks without it, he advised.
"You can make a fortune in the market, but if you're hemorrhaging money everywhere else, then a healthy portfolio isn't going to do you much good," added Cramer.
Paying off credit-card debt and getting health and disability insurance are the most important elements of capital preservation. Cramer highlights these elements, because when he is giving daily recommendations for investing on "Mad Money," he assumes that investors have these things crossed off their lists already.
In other words, in order to grow money for the future, you need to protect your money today.
The second step to creating real, sustainable wealth is to prepare for retirement. For those investors who are serious about getting rich, Cramer says that means preparing for retirement — regardless of age.
"Notice I didn't say save for retirement. I said prepare, because just stuffing your money in the first national bank of Sealy, a.k.a. stuffing it into your mattress, or automatically saving it into an IRA or 401(k), great though those two tax-deferred vehicles may be, might not be enough to prepare for your retirement," the "Mad Money" host said.
However, there is a caveat to contributing to a 401(k), and that is what the money is used to invest in.
Cramer advised that you should not use much of your 401(k) funds to buy stock in the company that employs you.
Why? Because one of the key components to investing is diversification. Meaning that if you expose too much of your portfolio to the same sector, than you run an enormous risk.
Read More Cramer: Never, ever put this in your 401(k)
Cramer wants you to remember that there is no such thing as a get-rich-quick scheme. That is why he advised that most reliable way to make money grow is to do so slowly and with prudence.
But too much caution is also bad news as well.
So, when it comes to retirement, Cramer does not want investors to hide their money and cling to safety with the assumption that there will be enough money to retire. A little risk in stocks with higher returns will ensure a wealthy retirement.
Conventional wisdom teaches that investors need to reduce as much risk as possible when investing retirement money. However, Cramer disagrees.
Cramer's rule to remember when selecting bond allocations is to go by age. Here are his recommendations for bonds, by order of age:
- Younger than 30: No reason at all to own bonds
- In your 30s: 10 to 20 percent of your portfolio
- In your 40s: 20 to 30 percent of your portfolio
- In your 50s: 30 to 40 percent of your portfolio
- 60 to retirement: 40 to 50 percent of your portfolio
- After retirement: Own some stocks, especially high yielding stocks that can generate more income with less risk, approximately one-third of your portfolio
When there is a 10 percent decline in the , Cramer says you should take advantage and double down on your money. That means to put twice your normal 401(k) contribution amount.
He recommends investing in a low-cost index fund or an actively managed fund that operates like an index fund with a manager who has a long record of consistent out-performance.
Most likely, this approach will not make a huge difference in five years, but over 40 years it will mean tens or even hundreds of thousands of extra dollars. Taking an active, rather than passive, approach is the only way to go in this age of investing.
So, while Cramer does think that it is important to contribute to a 401(k), he is not part of the crowd that thinks you should max out the limit.
The biggest benefit to a 401(k) plan is that an employer will match at least some percentage of contributions up to a certain point. That's free money, which only a fool would not take advantage of.
"I believe that the best way to invest, as you know, is to buy a diversified portfolio of individual stocks and do the homework on each one of them — ideally one hour per week per stock — so you know when it is time to buy more, when it is time to sell something, and when it is time to sell everything," Cramer added.
The problem is that most 401(k) plans don't give you the option. Instead it will let you choose between a couple of stock and bond funds, and Cramer is generally not impressed with the selections.
But then there is this benefit of a company matching contributions to a certain point.
So, what the heck do you do?
That is why an Individual Retirement Account is so important. An IRA doesn't have the high management fees that many 401(k) plans do, and it will let investors invest the way they want to.