How compound interest can turn your stimulus check into a fortune

Stimulus checks printed at the Philadelphia Financial Center in Philadelphia.

Jeff Fusco | Getty Images

The latest round of $ 600 stimulus checks is a welcome reprieve for the millions of Americans financially affected by the Covid-19 crisis. For those who have lost income or benefits in the 10 months since the first Covid landing, checks offer a chance to catch up financially. For wealthier Americans – those who still have jobs or whose incomes have not declined – these checks can provide a golden opportunity to invest. And if larger checks – such as the $ 2,000 guaranteed by the Biden administration – are approved, then this opportunity is even greater. Thanks to the magic of compound interest, those relatively small amounts can grow to be much larger. We do the math to show you how.

A family of four

For a typical family of four with adjusted gross income up to $ 150,000, checks of $ 600 per person will total $ 2,400. While it may be tempting to spend or just save this money, consider that average stock returns hover around 10% per year, providing an opportunity to quickly grow that money well beyond 1% or less. interest offered by traditional savings accounts. .

If a family of four invests that $ 2,400 in a typical broad-market ETF or a diversified equity portfolio, they can expect approximate returns as follows, based on historical average returns:

In five years, the $ 2,400 would drop to $ 3,800; in 10 years, they would have $ 6,100; in 20 years, $ 16,100; and in 35 years, a whopping $ 67,000.

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Add to your investments

You can keep increasing your investment and help it grow even faster. The money to make additional investments might be easier to find than you think. For example, the typical American receives a tax refund of about $ 2,800. If you were to add that $ 2,800 a year to your initial investment in stimulus checks, our calculations on the back of the envelope show that your money would grow even faster. In reality:

In 10 years, you would have about $ 52,000.

In 20 years, that amount would exceed $ 181,000.

And at 35, you would have a whopping $ 847,000.

Remember that your money may grow faster or slower, depending on how much you invest and the actual performance of the stock market. Consider playing around with a compound interest calculator, inserting different interest rates or monthly contribution amounts to estimate your potential profits over time.

If the idea of ​​investing for the first time seems daunting, consider using micro-investing apps, such as Tassels, which automate the process and take the guesswork out of it. Or, consult your bank’s financial advisor for advice.

Every dollar you spend today is lost forever, but every dollar you invest will become much more.

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