Updated : Sep 06, 2019 in Articles


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. [outro music]


  • awww yissss!
    I always used to panic when I hear people throwing investment terminology around, because I had no FRACKING idea what it all meant.
    Now I just worry about having no money to invest in the first place. But at least now I know how I could use money in a parallel, more lucrative life!

  • Generally speaking, you want to look at a Roth IRA before putting money into a taxable brokerage account – so be sure to check out that info!

  • Great video! Any tips/strategies on WHEN to get started saving for retirement? I assume the earlier you start saving, the better long term payoff?

  • I just went to a publishing event on this and I didn't understand a darn thing. This explained it all so much better. Thank you.

  • Great vid guys, but I would have liked to see more on compound interest. It's very powerful and can encourage others to save / invest when they realize it's potential.
    Albert Einstein said: “Compound interest is the eighth wonder of the world. He who understands it, earns it … he who doesn't … pays it.”

  • Great video! I would love a video delving deeper into the world of investment. I get the basic idea, and I'm tired of my money doing nearly nothing in my savings account. But I have no idea how to get started.

  • Please use more Harry Potter metaphors to relate to adulting issues in the future. 🙂

    Also, nice editing work @Nathan Talbott!

  • money always seems kinda pointless among the wizards in harry potter. was there some rule that any sort of trade with muggles was illegal, because based on many of the things that folks have (like brand name cars that have been modified with magic) there wasn't much restriction there. lets say you own a chunk of land that can grow trees and are a wizard, you grow a bunch of trees fast with magic, make another spell to mill those trees in a few hours, sell the lumber to muggles, buy gold, poof, lots of money you can take to gringotts. i just never understood the idea of money for the wizards, actual trade of course makes sense, but money seems kinda meaningless for them.

  • Actually guys, for young adults, it's smarter to roll your money into a RothIRA. This is for a couple reasons:
    1) Young people will probably be changing jobs a lot, but you can't usually take your 401(k) from one job to another, and in fact they might actually charge you a fee to keep it for you after you leave a company.
    2) You'll be taxed for whatever you put into it, but as a young person, it's likely you're in a small tax bracket. You'll save money buy paying taxes at these lower rates now, than when you're 60 or 70 and taking money out of your retirement account, when you're in a higher tax bracket.

  • Oh bother. Thanks for this! 2015 will be my first year of having real grownup job(s) which means starting out on the right track with budgeting and investing and all those things that are as understandable as wrackspurts. Definitely saving this video! 

  • You should explain to people the percentage of their income they should be saving for retirement based on a few broad age groups. It's great to open an account to save for retirement, but if you only put $500 in it and call it a day, you are going to have a hard time living for a few decades (idealy) on $500. 

  • This video and your videos on taxes have been super helpful to me lately as my father recently passed and I've had to help my mom figure out all the financial stuff he had going on as well as start my own adventure into jobs and taxes and other unpleasant adult things.

  • I actually just started my first grown-up job and they were all like "Hey!  Here's some people we would support you getting a retirement account with!  Now moving on to signing your life away."  They gave absolutely no instructions on how to start or anything so at least now I'm not going to go into this blind!

  • If you are investing your retirement account in stocks and want it to grow, there's two urgently important steps I recommend that it seems most people skip:

    1) Research!  Pull up their financials and look them over.  Do they have a lot of long term debt, and if they do have some are they paying it down or is it going up over time?  Are their uncollected accounts receivable just a small portion of their sales or are they having problems getting paid?  Do they have good cash flow and are they reinvesting profits into growing the business?  Are the executives and board members invested in the stock or have they been selling off their shares?  All of these will give you some indication of how well the company is managed and it's potential to continue to grow your investment.  Perhaps most important: do you like the way this company does business or are they evil jerks?  If you wouldn't want to be a customer or work for the company then you probably shouldn't put your money there.

    2) Pick your sell points!  Stock prices have ebbs and flows like a tide.  Buy-and-hold is a reasonable way to maintain value but it's not the way to grow your investments.  Everyone knows to buy low and sell high but most people make the mistake of not picking their sell prices when they buy the stock.  Most people will hold onto their stocks way too long and either they lose a large percentage of the value they had gained when it peaks and starts to go back down or they lose a large part of their investment when it drops but they hang on just knowing it'll go back up.  When you are holding on too long you are missing out on the thousands of other companies you could be invested in instead.  The way to avoid this is to pick a high sell price (up 10% to 20%; no need to be greedy here) and a low sell price (down 10% to 20%) at the time you make the buy.  The lower the percentages the less the risk, but if you buy and sell too often you'll lose more to the transaction fees so be sure to balance that factor into your decision.  And once you've sold the stock – high or low – don't look at the price of it again for at least six months.  Obsessively following it when you no longer own it will just give you unnecessary aggravation those times when it makes you feel you sold too soon.

    Following these steps for most average investors will mean making a transaction to shift money from one stock to another about every three to six months.  You don't have to follow the prices every day; glancing at them once a week is usually enough especially if your brokerage allows you to put in 90-day open orders to sell for you if the stock hits your sell points.  And then just two or three times a year you'll need to make some time to look over various companies until you find one you like enough to be your next investment.  But that little bit of time will make a huge difference in the value of your portfolio.

  • I wish I was told (or helped on my behalf) about Bonds and things when I was 16. I inherited some money from my grandmothers death teats been sitting untouched in an ISA for quite a few years at this point – I'll look deeper into a better place to use.

  • No taxes until you start withdrawing but there are company FEES. Right. Why don't I just bury my money in the fucking ground???

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