1. Invest the money in an index fund through a Roth IRA. A Roth IRA is a type of retirement account. One of the best things about investing money in a Roth IRA is that you can invest money without having to pay taxes on the profit you make. You can also withdraw your contributions at any time before retirement (tax-free) if you need the money for something else. If you invest in index mutual funds (like the Total Stock Market Index Fund) through a Roth IRA and leave the money in the account until you retire, interest will build overtime and you can make a large profit. The average interest rate/yearly profit of index funds is around 10% per year. Investing $1,000 of your stimulus check in the Vanguard Total Stock Market Index Fund is estimated to grow to over $17,000 in 30 years.
2. Increase the contributions in your 403b or 401K. Another way to invest your stimulus check is to invest in mutual funds through your employer-sponsored retirement account. Although you can’t physically transfer the stimulus money from your bank account to your work retirement account, you can go to your work portal and have your job invest $1400 from your next check into your work retirement plan. Similar to a Roth IRA, investing this money in a retirement account allows you to build wealth overtime. The benefit of investing this money in your work retirement account (or having the money deducted from your next check) is that it can save you money in taxes and may allow you to get extra money from your employer in the form of a retirement “match.” if you decide to have your job take out an extra $1400 from your check to invest in the Vanguard Total Stock Market Index Fund, that money is estimated to be worth over $24,000 in 30 years.
3. Open a 529 account to invest the money for your kid’s college. For those who are parents, investing the money in index mutual funds through a 529 account may be a good idea. A 529 account is similar to a Roth IRA or a 401K, but instead of using the money for retirement you can use it to fund your kid’s college education. Through a 529 account, you can invest in index mutual funds and allow the interest to stack up over time. Once your kid hits college age, you can use the money in this account to pay for their education. By investing money in this account, you can accumulate a lot more money for your kid’s education than you would by merely saving money in a savings account. If you invested the $1400 stimulus check in the Vanguard Total Stock Market Index Fund via a 529 account and let the money stack there for 18 years, that money will be worth almost $8,000.
4. Purchase index funds via a taxable account. Another way to invest money is to open up a regular brokerage account and purchase index funds through it. Similar to retirement accounts or a 529 account, a taxable account allows you invest money that will make you a profit over time. The good thing about a regular taxable/brokerage account is that you can invest money over time and withdraw your profits at any time (you don’t have to wait until retirement). You can also open these accounts invest in stocks or index funds through apps on your phone like Robinhood. The disadvantage to investing money in regular brokerage accounts is that you have to pay taxes on the profits you earn. So if you invest the $1400 stimulus check in the Vanguard Total Stock Market Index fund and it has a profit of 15% over the next year (so grows to $1610 making you a profit of $210) you have to pay taxes on the money at your ordinary income tax rate (which can range between 10-35% depending on your income level).
5. Open a custodial account for your children. Another way to invest the money is to open a custodial account, which is also known as a UGMA (Uniform Gift to Minors Account). This type of account allows you invest money on your kid’s behalf. If you aren’t sure if your kids will go to college and want to invest the money on their behalf to give to them when they are in their 20s, you can use this UGMA/custodial account. Similar to a 529 account, you can invest money for your kids, but unlike a 529 account the money does not have to be used for college. It is your kid’s money to use however they wish when they turn legal age (between 18-25 depending on the state).
Tell me, do you plan to invest your stimulus check? If so, do you plan to use one of the methods above?
Saving money isn't enough, You must INVEST!
If you are a young professional, there is a good chance your job has a retirement plan. Since I work for a non-profit organization, my retirement plan is called a 403b, but it is very similar to a 401K that many other companies offer. Even though I am decades away from retirement and could use even more cash to pay for things now, investing, especially investing for retirement, is a necessary sacrifice that I’m making right now. So should you.
Investing will allow me (and you) to:
-increase our net worth
-build wealth
-pay down debt sooner
-provide a better life for our family
-live a better lifestyle
-become less dependent on our job
-have financial security when we are no longer able to work
Contrary to popular belief, most of us cannot just save our way to retirement or to a better life. Saving money is important, but it is not enough.
The interest rates in savings accounts are too low (so our money doesn’t increase much just sitting in a savings account) and inflation is too high (which means the price of things goes up each year). This means money made today is actually worth less than many made tomorrow because you can’t buy as much with it. Given these two principals, it is vital that you invest money. Let me give you an example.
Let's say person A makes $60,000 a year and decides to merely “save” 10% of her income each year (which is $6,000) in a savings account. Let’s say person B makes the same amount of money but instead decides to “invest” $6,000 (through his work retirement plan or Roth IRA) in stock market index funds which earn an average of 10% in interest each year.
After 10 years, Person A will have $6,000 x 10 years = $60,000 saved.
According to Table 1 below, after 10 years Person B will have a total of $95,624.55.
Person A contributed a total of 60,000 and didn't make any money in profits. Person B contributed the same amount of money ($60,000) and made over $35,000 in profits after 10 years. Person B now has $30,000 more than Person A by choosing to invest money instead of just save it.
If this trend were to continue for another 10 years, this difference would be even larger. Person A, by continuing to keep the money in a savings account, would have $120,000. Person B, by continuing to invest in index funds that earn an average of 10% in interest each year, would have $343,650. Nearly 3x as much money!
As you can see from this example, investing is critical to building wealth!
It is so critical that once you have a certain amount of money in an emergency fund, you should start investing money, even as you try to pay down debt. If you wait until you are completely debt free to start investing, you may be delayed in investing by several years and would thus miss-out on years worth of extra profits.
Thankfully, there are many different ways you can invest money. Some people invest in real estate, others invest in their own business. But as I’ve shown in the example above, one of the most popular ways to invest is in the stock market. Some people purchase stock in individual companies, but I prefer to purchase index funds, which are large groups of stocks from many different companies. Index funds earn an average of 10% in interest each year, which is what I used in the example above. Getting a 10% profit on your money each year will add up over time.
Although you may choose a different type of investment keep in mind that certain investments and accounts may cause you to make more money than others, some may pose a lot more risk than others, and some may require you to pay more taxes than others.
One of the simplest and tax-efficient ways to start investing is to open a Roth IRA or contribute to your work-sponsored retirement account (which is a 401K, 403b, or 457). Once you determine which account to use, decide how you want to invest the money in that account. I purchase stocks and bonds via index funds, but you can choose what is right for you based on the options your job has available. The important thing is that you start investing money now so that you can become more financially stable and start to build your net worth over time. While saving money is good, investing money is better.
Tell me, have you started investing money? If so what investments are you making and what type of account are you using?
