Whether you've already received your third stimulus check or are eagerly awaiting it, you're probably considering how you want to spend this money.
Many Americans will spend their stimulus money on rent, groceries, or other necessities -- which is a good idea if you're having a tough time making ends meet. If you don't have a solid emergency fund, using your stimulus check to pad your savings account is also a smart move.
But if your finances are in order and you already have a healthy stash of savings, you might choose to invest your stimulus check.
This can be a fantastic option for building long-term wealth, and by investing in the right places, you could turn your $1,400 stimulus check into $100,000 or more.
Image source: Getty Images.
Where to invest your money
How you choose to invest will depend significantly on your tolerance for risk. Riskier investments have higher potential for reward, but you could experience substantial losses as well.
One way to limit your risk is by investing in index funds or ETFs. These are investments that contain dozens or hundreds of stocks. This limits your risk because you're spreading your money across many stocks rather than putting all your eggs in just a few baskets.
You can invest in broad-market funds that mirror the stock market as a whole, or you can invest in niche funds that track particular sectors of the market.
Broad-market funds, such as S&P 500 index funds, are one of the safest types of investments available. Although they do experience short-term volatility, you're almost guaranteed to see positive returns over the long term.
Despite their relative safety, however, S&P 500 index funds can help your money grow exponentially.
Making your money work harder
One of the biggest advantages of investing in S&P 500 index funds is that they require zero effort on your part. You never need to worry about picking stocks or deciding whether it's time to sell your investments. All you have to do is invest your money, then let the fund take care of the rest.
Since the S&P 500's inception, it has earned an average rate of return of around 10% per year.
Say you were to invest your $1,400 stimulus check in an S&P 500 index fund earning a 10% annual return. Let's also say you continue investing $100 per month. At that rate, you'd reach $100,000 in total savings after around 23 years.
The beauty of S&P 500 index funds is that the more you invest and the longer you let your money grow, the more you'll earn.
For example, say you were to invest $300 per month in addition to your initial $1,400 investment. Assuming you're still earning a 10% annual rate of return, here's roughly how much you'd have saved over time:
| Number of Years | Total Savings |
|---|---|
| 5 | $24,000 |
| 10 | $61,000 |
| 20 | $216,000 |
| 30 | $617,000 |
| 40 | $1,657,000 |
Data source: author.
The key to making a lot of money with S&P 500 index funds is to start investing early. These investments are most effective when you leave them alone for as long as possible. The earlier you start investing, the more your money will be able to grow.
Choosing the right index fund
You have a lot of choices when it comes to S&P 500 index funds, and they're all similar. A few of the most popular options include:
Each of these funds is a good choice. They all track the S&P 500, and they all have low fees -- which saves you money over time. Most importantly, they can all help you make a lot of money in the stock market. By investing your stimulus check wisely, you can earn more than you may think.
This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis -- even one of our own -- helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.
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March 24, 2021 at 04:30PM
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