Mad Money

Cramer: Common financial misconception costs most Americans


Jim Cramer worries that too many Americans don't understand something critical about their money. And he thinks it could be very damaging.

It's the concept of opportunity cost and how it impacts long-term wealth.

"Whenever you make a choice about where to put your money, the opportunity cost is what you're giving up by not putting your cash somewhere else," Cramer said.

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Cramer believes currently too many Americans are putting too much of their savings into bonds, CDs and bank accounts that offer little to no return.

The opportunity cost, he says, is the much larger returns you could get from putting that money in the stock market.

Of course, Cramer realizes the stock market presents more risk, and he also believes bonds, CDs and savings accounts have a place in your financial future, but he says taking reasonable risk is well worth the reward.

"That may sound theoretical," Cramer admitted, "but it's not."

Cramer has done extensive research and he's found that time and again, investing your money in a strategic and diversified portfolio of five to ten stocks, almost always generates better returns over the long-run than bonds, CDs or savings accounts.

"High quality stocks with good balance sheets and growing dividends are the way to go. Trust me, if you buy these kinds of stocks, then within a few years from now, you'll be glad you did. "Or even if you simply put that money into a low-cost S&P 500 index fund, the rule of thumb, over the long term, is that you can expect to average out to about an 8% return a year."

All told, "I think stocks give you the best chance," said Cramer, referring to the ultimate goal of most Americans; achieving a life of affluence. "For most people, your paycheck will not be enough, You must look at your savings as capital. Something that can be used to make you even more money."

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And if that money is sitting in a bond, CD or savings account, it's safe but it's not growing; therefore "you're missing the opportunity to make much more money."

That's what Cramer means by opportunity cost, and as far as he's concerned, it's something that most Americans just can't afford.

Call Cramer: 1-800-743-CNBC

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