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Emma: Hey! So we've talked about checking accounts and making a monthly budget, which are great for the short term, but what about long term goals? What about retirement or college savings for your kids, or money for the Walt Disneyworld resort super-awesome vacation home that you're planning to buy in twenty years, approximately?

These kinds of savings require your money to do some growing, or at the very least, keep up with inflation, which is where investing and retirement accounts come in.

An investing account, more commonly called a brokerage account is like a savings account that you can use to invest in the stock or bond markets. You deposit money like you would into your checking account, but instead of that money just sitting there as cash, you invest it in things like individual stocks, bonds, and mutual funds.

Stocks! Bonds! Mutual funds!

Investment accounts can be easily opened at any online brokerage, like Vanguard, eTrade, or Fidelity, and it's very similar to opening a savings or checking account, with just a few additional steps. Statistically speaking, these investments tend to have a much higher return than a cash savings account. Invested long-term, equities have historically returned an average of about 10% per year, so if you put $500 into your investment account, you're going to make $50 bucks each year.

Michael: [off camera] The first year, yeah, on average, you would make, fifty bucks, but then you have five hundred and fifty bucks.

Emma: Oh! So then the next year, you'll make 55!

Michael: That's called compound interest.

Emma: You heard it from Mike, guys, compound interest.

But those returns come with a higher risk, as stocks and other equities can lose money in difficult economic times. So investments should only be made with money that you don't plan on using for at least five years.

Now money in a brokerage account is taxable, so additional income you receive from these accounts, say in the form of dividends or capital gains, is taxed each year.

Dividends! Capital gains! This can pull down your potential growth.

This brings us to the second account type we want to talk about today, a retirement account. There are many different types of requirement accounts. Requirement accounts? It's like the Room of Requirement. Fittingly, Harry Potter was pretty rich, right?

Michael: Yes!

Emma: Like, he inherited a good deal of money, but I hope that he put that to good use in, like, the wizarding stock market. Yeah, he's got kids to think about.

There are many different types of retirement accounts, but the most common type is the 401(k). 401(k)s are often offered through employers, sometimes with a sweet bonus of them matching your contribution. So you put in a little bit of money, and then they give you an equal amount of money? So that's cool!

Retirement accounts in general function much like brokerage accounts except that most retirement accounts are tax advantaged in some way. For example, if you contribute to a 401(k) plan, the money you contribute each year is not taxed right now, and the growth, dividends or capital gains you receive are not taxed right now either. Instead that money is all taxed when you begin withdrawing it in retirement. This offers two distinct benefits. First, with your growth not being taxed for decades, your money can grow faster and at a higher average percent each year. Second, most people are in a lower tax bracket in retirement than they are during their working career, meaning not only have you delayed those taxes for decades of growth, but you then usually pay lower taxes when you do begin withdrawing that money.

One thing to look out for: Death Eaters! Basilisks! Fees! Fees equal Death Eaters. This isn't a perfect metaphor, but we're doing what we can.

One thing to look out for? Fees! Some companies have higher fees on their accounts than others, and over time, these can add up for real. As usual, links in the dooblydoo below with more information. Now depending on your personal financial situation, it may be more advantageous to opt for different types of retirement accounts, such as a Roth IRA. Again, here the dooblydoo is your friend.

Whatever route you decide to go, it's definitely worth investigating and investing. Investment and retirement accounts sound pretty scary but once you dive in, it's actually pretty straightforward. Just be sure to invite me and Mike to that Disneyworld retirement dream home, because then it will truly be the happiest place on Earth.

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