Here's how compound interest can turn your stimulus check into a fortune
The latest round of $600 stimulus checks are a welcome reprieve for the millions of Americans financially impacted by the Covid-19 crisis. For those who have lost income or benefits in the 10 months since Covid first washed ashore, the checks offer a chance to catch-up financially. For more fortunate Americans – those who are still employed, or whose incomes haven't declined – these checks can offer a golden opportunity to invest. And if larger checks – such as the $2,000 backed by the Biden Administration – are approved, then that opportunity is greater still. Thanks to the magic of compound interest, these relatively modest sums can become something far bigger. We do the math to show you how.
A Family of Four
For a typical family of four with an adjusted gross income up to $150,000, the $600 per person checks will total $2,400. While it may be tempting to spend or simpy save this money, consider that average stock market returns hover in the vicinity of 10% annually, offering an opportunity to rapidly grow that money well beyond the 1% or less in interest offered by traditional savings accounts.
If a family of four invests those $2,400 in a typical broad-market ETF or diversified stock portfolio, they can expect approximate returns as follows, based on historical average returns:
In five years, the $2,400 would grow to $3,800; in 10 years, they'd have $6,100; in 20 years, $16,100; and in 35 years, a whopping $67,000.
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Adding to Your Investments
You can keep adding to your investment, and help it grow even faster. The money to make extra investments might be easier to find than you think. As an example, the typical American receives a tax refund of approximately $2,800. If you were to add those $2,800 per year to your original stimulus check investment, our back-of-the-envelope math shows that your money would grow even more quickly. In fact:
In 10 years, you'd have about $52,000.
In 20 years, that sum would exceed $181,000.
And by 35 years, you'd have a whopping $847,000.
Remember, your money may grow faster or slower, depending on how much you invest, and actual stock market returns. Consider playing around with a compound interest calculator, plugging in different interest rates or monthly contribution amounts to estimate how much you might profit over time.
If the idea of investing for the first time seems intimidating, consider using microinvesting apps, such as Acorns, which automate the process and remove the guesswork. Or, consult with your bank of financial advisor for guidance.
Every dollar you spend today is gone forever, but every dollar you invest will grow into many more.
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Disclosure: NBCUniversal and Comcast Ventures are investors in Acorns.