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Cramer explains why investing for kids can have a huge payoff

Elizabeth Gurdus

Investing for children can be tricky, but CNBC's Jim Cramer says that if you do it right, it can leave your loved ones much better off by the time they grow up than if you avoid it altogether.

"Parents, grandparents, listen up. You can give all sorts of things to families that had just had babies. I want you to open up accounts for them. Or at least give them some shares of stock so that from the earliest moment you can start the process of saving that you have to do," the " Mad Money " host said.

Cramer's first suggestion was taking several hundred dollars and buying shares in an index fund like the S&P 500 , then pairing that with some kind of total return fund, which provides a wider array of stocks.

The "Mad Money" host acknowledged that some brokers might recommend funds with higher growth, which he said could be a nice addition for infants who have their whole lives in front of them.

"These kinds of funds can really compound over time, meaning that if you let it run, the money can build upon itself," Cramer said.

For investors who are more interested in buying individual stocks for newborns, Cramer suggests picking two — a stock with a dividend that could be increased each year and then reinvested, and a stock with some more growth.

The first kind of stock can be a share of a company such as 3M , Procter & Gamble , Kimberly-Clark or PepsiCo — steady, consumer goods names that provide healthy, growing dividends.

The second should be "something with a little more juice," Cramer said. He recommended the FANG stocks, his acronym for Facebook , Amazon , Netflix and Google, now Alphabet .

Cramer chose Facebook for its high growth and deep bench, Amazon for its powerful, yet still-small presence in the $4 trillion retail market, Netflix for its game-changing mission and Alphabet for its strong balance sheet, stellar advertising platform, innovative staff and self-driving car initiative, Waymo.

The "Mad Money" host said that investors who want to set up an account for a young child or newborn should do so through a 529 Plan, a state-sponsored college savings tool authorized by the Internal Revenue Code.

All 50 states offer college savings plans under the Section 529 of the Internal Revenue Code, and some private colleges and universities sponsor pre-paid tuition plans.

"I think it's one of the better tax breaks around," the "Mad Money" host said.

Cramer added that buying gold and silver can also be great insurance components to any portfolio, since they do next-to-nothing and can sit in a safety deposit box for years.

"The bottom line: when a child is born, think about setting up a [529 Plan] and putting index funds or individual stocks in with the index funds. Or, at least, consisting of an S&P 500 fund and the stocks consisting of a growth vehicle and an income one [where] you let the income compound. A high yield can lead to a doubling by the time the child reaches 10," Cramer said. "Don't put this off. This must be done at the earliest moment to get the most time involved for your brand new loved one. No one has ever regretted this idea."


WATCH: Cramer's guide to investing for kids

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