Cramer’s 10 Tips for Building Wealth

Forget about getting rich quick, Cramer says. Better to build wealth over a long period of time. That’s why he devised these 10 rules to guide you along the way. Some are about capital preservation, others are about capital appreciation. Regardless, though, they’ll help you generate a nice nest egg for retirement. And who doesn’t want money enough to enjoy his or her golden years? Read on for the Mad Money host’s step-by-step plan for financial freedom.Posted 1 Oct 2009

Before you build more wealth, Cramer says, you must protect what you have. So clear your plastic of any balances. That high interest rate you’re paying will erase any gains made from other investments.

Medical emergencies are the single biggest cause of bankruptcy in this country, so why risk the downside? Don’t invest a penny in the market before you have health insurance, Cramer says.

This is important for the same reason. All your investment gains can disappear in a flash if an injury has made working impossible, and you don’t have disability insurance to support yourself.

It is possible to be too cautious, too prudent and too risk-averse. That’s why Cramer urges his viewers to invest for their golden years, rather than save for them. IRAs and 401(k)s are great, but unless they are properly managed you might not have enough money for retirement.

Photo: AP Believe it or not, buying your employer’s stock is the number-one 401(k) investment. That’s a no-no, Cramer says. Remember how Enron’s collapse destroyed its workers’ wealth? Instead, diversify with a basket of companies from different sectors.

The best way to invest in stocks in a 401(k) plan is to find a cheap S&P 500 index fund that mimics the S&P. It will be a good proxy for the market's high-quality stocks.

This is how Cramer says to balance your holdings: Keep 10%-20% of your retirement portfolio in bonds when you're in your 30s. There’s no reason to own bonds before you turn 30. Then in your 40s keep 20% to 30% of your retirement portfolio in bonds. In your 50s, it’s 30% to 40%. And from 60 until you retire, go with 40% to 50% bonds. When you retire, you should still own some stocks, maybe about a third of your portfolio.

Well, at least do this much: When the market declines 10%, what professionals call a correction, double down on your contribution that month. Over 40 or 50 years, the extra investment could mean tens or even hundreds of thousands of dollars.

Never max out your 401(k) contributions, Cramer says. That money could be better spent elsewhere, such as in an IRA, which allows for more investing options. Only put in as much as your employer will match.

After you get the full match in your 401(k), you want to put all the rest of the money you're saving for retirement into an IRA. Your contributions are tax-deductible, and you pay no taxes on any gains inside the IRA until you start withdrawing the money in retirement, at which point it gets taxed as regular income.

© 2009 CNBC.com