Do you want to be held hostage by your paycheck
Post# of 63704
Posted On: 11/02/2014 6:28:28 PM
Do you want to be held hostage
by your paycheck for the rest of your life? Didn't think so. That's why Professor Cramer dives into the first item on his syllabus: saving.
"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 you can afford to, he says.
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 that you only pay tax when you withdraw the money at retirement.
Read MoreCramer basics: How to save, save, save
Okay, so you have saved your money like Jim 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 go.
To start to pick individual stocks, you need to read the company's SEC filings. Most important 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, and compare it to the competition
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, or 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," said Cramer.
Read MoreCramer basics: How to value your portfolio
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.
Cramer recommends that you take every deduction you can legally get away with. That means knowing the difference between a short-term and long-term capital gains.
If you buy a stock and then sell it less than a year later, your profits will count as a short-term capital gain and are taxed at the ordinary income rate. That can be up to 39.6 percent. Yikes.
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.
"When you're investing in stocks, just tell yourself what I used to tell myself at my old hedge fund: it's okay to pay the tax man. It's a sin to give up your gains."
Now that you have the education to be an investor, go out there and make Cramer proud and make some mad money.
by your paycheck for the rest of your life? Didn't think so. That's why Professor Cramer dives into the first item on his syllabus: saving.
"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 you can afford to, he says.
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 that you only pay tax when you withdraw the money at retirement.
Read MoreCramer basics: How to save, save, save
Okay, so you have saved your money like Jim 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 go.
To start to pick individual stocks, you need to read the company's SEC filings. Most important 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, and compare it to the competition
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, or 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," said Cramer.
Read MoreCramer basics: How to value your portfolio
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.
Cramer recommends that you take every deduction you can legally get away with. That means knowing the difference between a short-term and long-term capital gains.
If you buy a stock and then sell it less than a year later, your profits will count as a short-term capital gain and are taxed at the ordinary income rate. That can be up to 39.6 percent. Yikes.
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.
"When you're investing in stocks, just tell yourself what I used to tell myself at my old hedge fund: it's okay to pay the tax man. It's a sin to give up your gains."
Now that you have the education to be an investor, go out there and make Cramer proud and make some mad money.
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