Every once in a while, Jim Cramer likes to go back to the basics. Do you want to be held hostage by your paycheck for the rest of your life? Didn't think so. That is why Professor Cramer is taking a dive into the first item on his syllabus: saving.
He doesn't consider saving as just a way to make sure you have a comfortable future, but it can be fuel for investments in the stock market. Investments that will free you from the shackles of a paycheck—and could even make you filthy rich.
"My ultimate goal on this show is to teach you how to become better at managing your money—not just investment, but every aspect of your financial life," he said.
The first step? Start by saving 15 percent of your paycheck, or 10 percent if that's what you can afford, he said.
Start by putting half to two-thirds of your savings into a retirement account, such as a 401(k) or individual retirement account (IRA). Those are tax-favored vehicles, and you only pay tax when you withdraw the money at retirement.
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Okay, so you have saved your money like Cramer recommended and you followed his advice to split it between a conservative retirement portfolio and a more aggressive discretionary Mad Money account.
Now what the heck do you do?
Cramer believes that a diversified portfolio of five to 10 individual stocks is the best way to maintain a portfolio.
To start to pick individual stocks, you need to read the company's SEC filings. The most important ones are the annual report, known as the 10-K, and the latest quarterly report, called the 10-Q.
It all comes down to doing your research. Additionally, check out the company's sector and try to figure out of this is a good time in the business cycle to own the stock. Then compare it to the competition.
However to have a meaningful and diversified portfolio, Cramer said that you need to start with $10,000.
The reality is that money is really important. It can ruin your life and relationships at the drop of a hat. Or even the drop of a stock valuation.
Speaking of which, what the heck does valuation mean? How do you know the difference between something that is cheap or expensive? Professor Cramer is here to explain.
First, never judge a stock by its dollar price. Judge it only by its price-to-earnings multiple, also called its P/E.
Don't worry—you don't need a fancy college degree, or even know how to do math. Simple elementary school arithmetic will allow you to calculate the P/E.
The price of a stock (P), divided by its earnings per share (E), equals the price-to-earnings multiple (M).
Valuations are all about the future, not the past. That is why Cramer always looks at the earnings estimates for next year when he evaluates a company.
"My rule of thumb…is that I don't like to pay more than two times a company's growth rate for a given stock, meaning any stock with a PEG ratio of more than 2 is pricey."
Now that you know how to pick the stocks in your portfolio, there is something else you should have in your portfolio; cash. Cash is that fuel that will let you buy stocks when there is a weakness, because you can't buy low if your cash is tied up in the market.
"Before we get into the actual amount of cash you should have at the ready, let me just make one thing crystal clear: You should always have SOME cash in your portfolio," said Cramer.
In fact, Cramer considers not having cash in your portfolio a reckless act. And don't even think about borrowing money to buy stocks on margin. Don't make that foolish mistake even though many brokers encourage you to do so.
How much cash do you leave? Well, it varies.
"I will say this: for my charitable trust … I like to keep my cash position above 5 percent of the portfolio at pretty much all times. Anything below 5 percent and I feel like the trust might as well be running on empty," said Cramer.
Essentially, the higher the stock market goes, the more cash you should keep on the sidelines. Remember that the reason you need the cash in the first place is to be in a good position on the next pull back. So even if this is counterintuitive, the mentality of buy low and sell high has never really gone out of style.
Now that you know how to save, invest, value and diversify your portfolio there is always Uncle Sam to deal with. The fact of the matter is that there is a lot you can do to minimize the damage on tax day.
"A lot of people like to wait until the end of the year, or even until we get right up to that April 15 tax return deadline before they talk about tax planning, but the truth is, tax planning is something you need to understand year-round," the "Mad Money" host said.
One issue that has plagued investors for ages is the difference between how long-term and short-term capital gains are taxed. Essentially, if you buy a stock and then sell it less than a year later, the profits count as a short-term capital gain and are taxed at an ordinary income tax rate. That rate can range as high as 39.6 percent under the Obama administration.
But what if you hang on to the stock for more than a year and then sell it?
Profits from that sale would be considered as a long-term capital gain in the eyes of the IRS. For most people, the long-term capital gains rate is 15 percent or 20 percent, if you are in a higher tax bracket. And yes, if you are in the top three tax brackets there is a 3.8 percent surtax that you have to pay on the smaller balance of your net investment income or modified adjusted gross income. But these tax rates are still a heck of a lot cheaper than the ordinary income tax rate!
But the real problem is that many investors look at their taxes and see how much more they paid for short-term gain tax because they held a position for less than a year, and kick themselves for not holding it over a year..
However if you hold a stock for over a year and then sell it, this is considered a long-term capital gain. That can be anywhere from 15 to 20 percent under the Obama regime. If you are in a higher tax bracket there is a 3.8 surtax that you pay on whatever is smaller, but that's still a heck of a lot less than the short-term tax rate.
"I am saying that you should never keep holding a stock that could have an iffy future just so you can avoid paying the higher short-term capital gains rate," he said.
Now that you have the education to be an investor, go out there and make Cramer proud and make some mad money.