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Should You Invest Your Stimulus Check in Index Funds?

By Maurie Backman - Mar 18, 2021 at 6:48AM

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Sitting on a $1,400 windfall? Here's why index funds could be the best choice for your newfound money.

In case you missed the news, $1,400 stimulus payments have begun hitting recipients' bank accounts. If you're entitled to one, check your balance -- that money may already be there waiting for you.

Not everyone will receive a stimulus payment under the current round, and that includes some people who may have gotten one in a previous round. Individuals earning $80,000 or more and married couples earning $160,000 or more won't qualify for this stimulus round because the eligibility cutoffs were lowered. But if you're single earning $75,000 or less or married earning $150,000 or less, you should either have your $1,400 per person already or receive it pretty soon.

A lot of people will need their stimulus funds to pay for essential expenses -- things like rent, food, and utility bills. If you're in that category, you should absolutely use that money to cover your basic needs. But if you're not in that boat -- say, your income hasn't been cut at all and the $1,400 is truly a bonus payday for you -- then it makes sense to put that money to work by investing it. And index funds are a good option to consider in that regard.

Check from U.S. Treasury Department

Image source: Getty Images.

How do index funds work?

Index funds are passively managed funds that aim to match the performance of the market indexes they're tied to. If you buy S&P 500 index funds, for example, you'll effectively get to invest in the 500 largest publicly traded companies on the market, only you won't have to go out and buy shares of each one individually. Instead, you'd simply buy shares of the index fund of your choice.

The benefit of choosing index funds is that they take the guesswork out of investing. If you're not experienced at choosing stocks, you can spare yourself the heavy research that should go into it and fall back on index funds, instead. Index funds are also self-diversified -- because they track entire indexes, you're exposed to the broader market, which can help you grow wealth and minimize losses when stocks, in general, underperform.

There really aren't too many negatives to index funds other than not getting a say in the companies you invest in. But if you're a more hands-off investor, that may not be a problem.

The only other thing you should know is that index funds aren't designed to beat the broader market. To do that, you'll have to handpick stocks. But there's also risk in going that route, so if you're satisfied with a portfolio where the performance mimics that of the broad market, you're all set.

Say you decide to invest in S&P 500 index funds. That particular index has delivered an average annual return of more than 12% over the past 30 years. If you put your $1,400 stimulus into an S&P 500 index fund that delivers a 12% average return, in three decades' time, you'll be sitting on almost $42,000. That's a nice way to turn a modest windfall into a truly remarkable sum -- without having to put in much effort at all.

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