When Jim Cramer gives financial advice, people tend to listen. Although his stock-picking record could be better, his general money management and wisdom are often sound.
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Here are 10 things Jim Cramer says to do with your money that you can use to improve your financial well-being.
Start Investing Early
Cramer’s most important advice is to start investing early. He says this is the only way you’re going to be able to achieve financial freedom.
To understand why that’s true, consider the inflation-adjusted returns of the S&P 500. The 20-year average is 6.96%. This essentially means investing money into the market has beaten inflation by nearly 7% for the past 20 years.
Over time, these gains add up to a sizable increase in your wealth. The earlier you start, the earlier you can take advantage of this growth.
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Have a Clear Plan of Action
Next, Cramer says if you’re going to try to pick stocks, make sure you have a clear plan of action before entering a trade. This means articulating why you’re buying the stock now, how much you want it to grow before selling and the maximum loss you’re willing to accept.
If you don’t have a clear plan of action when trading, you’ll be subject to whims and emotions when making decisions. That’s a surefire way to delay financial independence.
Trade Small First
Cramer also suggests starting small when you first get into trading. This makes a lot of sense. You don’t want to risk a sizable amount of your wealth until you know you have an effective trading strategy.
Data suggests that between 80% and 99% of day traders lose money over time. This shows just how difficult it can be to make money in the markets when you aren’t thinking long term.
Don’t Get Greedy
Cramer’s most famous advice might be this line: “Bulls make money. Bears make money. But pigs get slaughtered.” The lesson is to stop yourself from getting greedy in the markets. Take your profits when your plan of action tells you to instead of holding out for further gains.
It’s Okay To Pay Taxes
Cramer doesn’t suggest you delay selling an asset just because you want to put off paying taxes. He says taxes are the cost of doing business, and you shouldn’t allow them to influence your investing strategy. When you feel like it’s the right time to sell, you should sell, even if that means having to pay more taxes than you wanted.
Pay Off Credit Card Debt First
Cramer joins Dave Ramsey and many other financial experts in stressing the importance of prioritizing paying off credit card debt. He recommends paying off any credit card debt you have before you start investing.
The reason is credit cards tend to have extremely high interest rates. This means your balance goes up faster over time. As it does, you’ll incur interest at a faster and faster pace, locking you into a vicious cycle.
Even though Cramer says we should always be investing in our future, that doesn’t necessarily mean putting funds into the stock market right away. Paying off high-interest debt now will likely be a better use of your funds.
Take Risks When You’re Young
According to Cramer, the time to take risks in the market is when you’re young. The reason? As you age, it gets increasingly difficult to bounce back from bad breaks before you retire.
You’ll also typically have less money in the market when you’re younger. Losing 20% of $10,000 is much easier to recover from than losing 20% of $1 million.
That doesn’t mean you should be making wild speculative investments in the hope of getting rich quick. Cramer just means that you can afford to put a higher percentage of your net worth into the market at a young age.
Adjust Your Risk Tolerance as You Age
As you grow older, Cramer says your risk tolerance should change. Instead of investing most or all of your money into the market, you should start holding assets with less downside, such as bonds.
The logic is the same as the logic for why young investors can afford to take more risk. The older you get, the more difficult it becomes to replace sizable losses without impacting your retirement date.
Use the “New High” List
If you want to be an active trader, use the “new high” list as a resource. This is a list of stocks that have recently put in a new all-time high share price.
Cramer doesn’t mean you should buy whatever stocks you see on the list. Instead, he uses the list as a tool to see what stocks are performing well. He then tracks the stocks he likes and looks for opportunities to invest when pullbacks occur.
Don’t Waste Your Money
Finally, Cramer echoes many financial experts in saying you can’t waste your money on frivolous purchases. When you spend more than you should on things you don’t really need, you’re really stealing from your savings and your future self.
He says he never wastes money on these items.
Not wasting money is sometimes easier said than done. But try to keep your spending within a preset limit.
For example, you might allocate 10% of your income to discretionary spending. Even though this takes away 10% of your take-home pay, it may keep you from wasting more than that by making it easier to avoid impulse purchases.
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