Compound interest

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 impacted by the Covid-19 crisis. For those who have lost income or benefits in the 10 months since Covid first landed, checks offer a chance to catch up financially. For more affluent Americans — those who are still employed or whose incomes have not declined — these checks may offer a golden opportunity to invest. And if larger checks — such as the $2,000 backed by the Biden administration — are approved, that opportunity is even greater. Thanks to the magic of compound interest, these relatively small sums can become much more. We do the math to show you how.

A family of four

For a typical family of four with an adjusted gross income of up to $150,000, checks for $600 per person will total $2,400. While it may be tempting to spend or simply save this money, consider that average stock market returns hover around 10% per year, providing an opportunity to quickly grow this 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 diversified equity portfolio, they can expect approximate returns as follows, based on historical average returns:

In five years, the $2,400 would rise 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 continue to increase your investment and help it grow even faster. The money to make additional investments might be easier to come by than you think. For example, the typical American receives a tax refund of approximately $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, this amount would exceed $181,000.

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

Remember that your money can grow faster or slower, depending on how much you invest and actual stock market returns. Consider playing around with a compound interest calculator, incorporating different interest rates or monthly contribution amounts to estimate your potential earnings over time.

If the thought of investing for the first time seems daunting, consider using micro-investing apps, such as Tassels, which automate the process and eliminate the guesswork. Or consult your bank or financial adviser for advice.

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