5 smart ways to invest your stimulus check

Posted: 11 January 2021 8:30 am
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Investment options are plentiful but the right one for you depends on your trading experience.

In response to the COVID-19 pandemic, Congress sent out three rounds of stimulus checks to eligible individuals and households. If you don’t immediately need the money to cover necessities, consider investing.

What is a stimulus check?

Stimulus checks are direct payments issued to American citizens from the US government in response to the coronavirus pandemic. Eligible Americans received three stimulus checks over the course of the pandemic as part of the government’s COVID-19 relief initiative.

The first check was issued on March 27, 2020, for $1,200. The second check was issued on December 27, 2020, for $600. The final stimulus check was made available on March 11, 2021, through the American Rescue Plan Act and amounted to $1,400.

Stimulus checks are designed to help those whose finances were impacted by lockdowns, stay-at-home orders and job insecurity. But you’re free to spend your check as you see fit. For those who don’t need the money to cover essentials, investing is a practical option.

5 ways to invest your stimulus check

Before you invest your stimulus check, you need to open a brokerage account. Some of the top online brokers require little to no minimum deposits, charge low fees and let you invest in a variety of assets. Here are some investments to get you started.

1. Index funds and ETFs

An index fund invests in a diversified basket of stocks from a broad market index. The S&P 500 is an index that’s considered a benchmark for the American stock market. Historically, it has returned an average of 10% annually. But despite the COVID-19 pandemic stretching most of the previous year, the S&P 500 returned 15% in 2020. So say you invest $1,800 (a combination of the first two stimulus checks for most eligible Americans). At a 15% annual growth rate, it can grow to almost $3,800 in just five years, assuming you invest nothing else into the fund during that time period.

There are a lot of index funds that track the S&P 500 out there. But some are even broader since they also invest in stocks of companies in foreign countries.

An exchange-traded fund (ETF) is similar to an index fund. However, it trades like a regular stock, so its price can fluctuate daily. Like index funds, ETFs are known for low management fees or expense ratios. Here is a list of some ETFs you may want to consider:

  • Global X Cannabis ETF (POTX)
  • Invesco DWA Technology Momentum ETF (PTF)
  • Invesco QQQ ETF (QQQ)
  • Vanguard Information Technology ETF (VGT)
  • Vanguard Growth ETF (VUG)
  • Schwab U.S. Small-Cap ETF (SCHA)
  • iShares Core High Dividend ETF (HDV)

Investing in index funds and ETFs can be a good move for beginners because it takes away the risk and effort of picking individual stocks. Instead, you invest in a diversified bucket of stocks and professionals manage these funds for you.

2. Robo-advisor

A robo-advisor is an automated investment platform that uses an algorithm to invest your money in a portfolio based on your investment goals. You just answer a few questions about your financial situation and the robo-advisor recommends a model portfolio. These portfolios are typically built with low-cost ETFs.

Many robo-advisors also automatically rebalance your portfolio when it finds opportunities. Many also offer free tax-loss harvesting services.

Using a robo-advisor is a step of ease below picking index funds and ETFs. You just invest and the robo-advisor does the rest for you. Robo-advisor options are offered by some of the globe’s largest financial institutions, but many let you open an account with little or no minimum deposit.

3. Blue-chip stocks

Blue-chip stocks come from well-established companies that have a reputation for strong performance — even during market downturns. Many also pay dividends. These are regular payments made to stockholders.

One issue, however, is that shares of blue-chip stocks can be expensive. However, some brokerages like Fidelity and SoFi let you invest fractional shares. This means you can invest as little as $1 to buy a proportional chunk of stock.

Here are some popular and well-established blue-chip stocks:

  • Alphabet (GOOGL)
  • Apple (AAPL)
  • Berkshire Hathaway (BRK.A)
  • Etsy Inc. (ETSY)
  • Johnson & Johnson (JNJ)
  • McDonald’s (MCD)
  • Microsoft (MSFT)
  • PayPal Holdings Inc. (PYPL)
  • Tesla (TSLA)
  • Walt Disney (DIS)

4. 529 college savings plan

If you want to invest in your child’s education, your stimulus check can go a long way in a 529 plan. These are investing accounts designed to help you pay for your child’s college education.

Investments in a 529 plan grow tax-free, and withdrawals are also tax-free if used on qualified educational expenses like tuition and college course books.

5. Health savings account

If you have a high-deductible health plan, you can open a health savings account (HSA). These investment accounts are designed to help you save for future healthcare expenses. They offer major benefits.

  • Contributions are tax-deductible
  • Interest and market gains earned are tax-free
  • Withdrawals for qualified health expenses are also tax-free

Because you don’t need earned income or taxable income to invest in an HSA, you can deposit your stimulus checks into it. You can open an HSA at most banks or brokerage firms. Your employer may offer one too.

What if I didn’t get my stimulus checks?

If you’re missing a stimulus check, use the IRS tool Get My Payment to check the status of your payment. If you’re eligible, this should give you an estimate of when to expect your check and where.

However, you may see this message: “Payment Status – Not Available.” In this case, you’d need to file your 2020 tax return by April 15th and claim the Recovery Rebate Credit. According to the IRS, you also would need to do this if the check got sent to a closed bank account.

You’ll also need your Notice 1444, a letter signed by President Donald Trump, which was sent in the spring of 2020 and January of 2021. Record the payment amount in the letter when you file your tax return in 2021.

Photo: Getty Images

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