In the next couple of weeks, most Americans will get a one-time $600 cash infusion in the form of a second stimulus check. Those payments will provide a slight reprieve for millions of people who are still jobless due to COVID-19 and need that money for basic necessities. But if you've been spared the financial devastation of this crisis, investing that check could pay off big time.
How much could your $600 grow in 10 years?
Suppose you'd gotten a $600 check in December 2010. You invested it in the S&P 500 index, you never touched it, and you automatically reinvested the dividends. As of Dec. 28, 2020, you'd have $2,188. That amounts to total returns of 264.7%, or annualized returns of over 13%.
A few caveats: In 2010, stocks were still recovering from the financial crisis, so you'd be investing your $600 at a low and then riding the longest bull market in history for the next decade. You definitely shouldn't count on 13% average annual returns for the long run. That also doesn't account for inflation. Something that costs $2,188 in 2020 would have only cost $1,833 in 2010.
What if your returns were in line with a more typical decade? Between 1960 and 2020, the S&P 500 delivered average annualized total returns of 10.3%. If you'd invested $600 in a lump sum and allowed it to grow for 10 years at 10.3% a year, you'd have almost exactly $1,600.
Stock market returns are never guaranteed, of course. But the longer your holding period is, the higher your odds of success are. If you invested money at any point in the S&P 500 over a 10-year holding period, you would have made money 94% of the time.
When should you invest your stimulus check?
Investing your stimulus check only makes sense if you're not struggling financially and you're well prepared for an emergency. Don't let the fear of missing out take over. If you need money for bills, that's absolutely the best way to spend this cash.
Using the money to pay down your credit cards should also be a higher priority than investing, as you're probably paying more in interest than you'd get in returns. Also make sure your emergency fund is in good shape before you invest this money. Aim for six months' worth of living expenses. The best way to protect your returns is by making sure you don't need to dip into your investments in a short-term cash crunch.
What's the best way to invest $600?
The simplest way to invest your $600 is to put it in an index fund that tracks the S&P 500. You get an instantly diversified portfolio of 500 of the largest corporations in the U.S., like Apple, Amazon, and Microsoft.
You could also use the money to buy a few shares of individual stocks you've had your eye on. Even if $600 doesn't cover the price of a single share, you could still invest using fractional shares.
But only invest money if you don't think you'll need it in the next five years. If your time horizon is sooner, the stock market isn't the place for that $600. Park it in a bank account instead.