1. Invest the money in an index fund through a Roth IRA. A Roth IRA is a type of retirement account. One of the best things about investing money in a Roth IRA is that you can invest money without having to pay taxes on the profit you make. You can also withdraw your contributions at any time before retirement (tax-free) if you need the money for something else. If you invest in index mutual funds (like the Total Stock Market Index Fund) through a Roth IRA and leave the money in the account until you retire, interest will build overtime and you can make a large profit. The average interest rate/yearly profit of index funds is around 10% per year. Investing $1,000 of your stimulus check in the Vanguard Total Stock Market Index Fund is estimated to grow to over $17,000 in 30 years.
2. Increase the contributions in your 403b or 401K. Another way to invest your stimulus check is to invest in mutual funds through your employer-sponsored retirement account. Although you can’t physically transfer the stimulus money from your bank account to your work retirement account, you can go to your work portal and have your job invest $1400 from your next check into your work retirement plan. Similar to a Roth IRA, investing this money in a retirement account allows you to build wealth overtime. The benefit of investing this money in your work retirement account (or having the money deducted from your next check) is that it can save you money in taxes and may allow you to get extra money from your employer in the form of a retirement “match.” if you decide to have your job take out an extra $1400 from your check to invest in the Vanguard Total Stock Market Index Fund, that money is estimated to be worth over $24,000 in 30 years.
3. Open a 529 account to invest the money for your kid’s college. For those who are parents, investing the money in index mutual funds through a 529 account may be a good idea. A 529 account is similar to a Roth IRA or a 401K, but instead of using the money for retirement you can use it to fund your kid’s college education. Through a 529 account, you can invest in index mutual funds and allow the interest to stack up over time. Once your kid hits college age, you can use the money in this account to pay for their education. By investing money in this account, you can accumulate a lot more money for your kid’s education than you would by merely saving money in a savings account. If you invested the $1400 stimulus check in the Vanguard Total Stock Market Index Fund via a 529 account and let the money stack there for 18 years, that money will be worth almost $8,000.
4. Purchase index funds via a taxable account. Another way to invest money is to open up a regular brokerage account and purchase index funds through it. Similar to retirement accounts or a 529 account, a taxable account allows you invest money that will make you a profit over time. The good thing about a regular taxable/brokerage account is that you can invest money over time and withdraw your profits at any time (you don’t have to wait until retirement). You can also open these accounts invest in stocks or index funds through apps on your phone like Robinhood. The disadvantage to investing money in regular brokerage accounts is that you have to pay taxes on the profits you earn. So if you invest the $1400 stimulus check in the Vanguard Total Stock Market Index fund and it has a profit of 15% over the next year (so grows to $1610 making you a profit of $210) you have to pay taxes on the money at your ordinary income tax rate (which can range between 10-35% depending on your income level).
5. Open a custodial account for your children. Another way to invest the money is to open a custodial account, which is also known as a UGMA (Uniform Gift to Minors Account). This type of account allows you invest money on your kid’s behalf. If you aren’t sure if your kids will go to college and want to invest the money on their behalf to give to them when they are in their 20s, you can use this UGMA/custodial account. Similar to a 529 account, you can invest money for your kids, but unlike a 529 account the money does not have to be used for college. It is your kid’s money to use however they wish when they turn legal age (between 18-25 depending on the state).
Tell me, do you plan to invest your stimulus check? If so, do you plan to use one of the methods above?