Let’s be honest: A $1,400 stimulus check isn’t going to turn you into a millionaire by itself. But if that $1,400 motivates you to start investing regularly, you could easily become a millionaire.
Before you think about investing your stimulus check, you should have enough money for bills, debt that’s manageable, and at least a three- to six-month emergency fund. If all three things are true, you’re in a good position to invest your stimulus payment. Try these five strategies for investing it like a millionaire.
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1. Don’t invest it all at once
If you want to invest like a millionaire, don’t invest your entire stimulus check all at one. Successful investors often use a method called dollar-cost averaging, where you regularly invest a fixed amount on a schedule. For example, you could break up your $1,400 stimulus check and invest $200 at the beginning of each month for seven months straight.
Even millionaires don’t like to overpay for stocks. By investing on a schedule, sometimes you’ll pay higher prices — but you’ll also lock in some lower prices, because you’ll be buying when the market is down. Over time, dollar-cost averaging usually produces better returns than investing a lump sum, because you don’t consistently overpay.
2. Copy their strategy with fractional shares
For some of the hottest stocks, $1,400 won’t even buy you a single share. As of March 19, 2021, a single share of Amazon would set you back over $3,000, while a share of Google parent Alphabet costs more than $2,000.
You can still invest in the pricey stocks millionaires love using fractional shares. Instead of buying entire shares, you name your price and get a corresponding portion of a share. For example, you could invest $300 in Amazon and get about a tenth of a share. It’s a much smarter way to invest on the cheap compared to penny stocks, which are extremely risky. Penny stocks are way more likely to make you lose all your money than they are to make you a millionaire.
3. Invest it in a Roth IRA for tax-free growth
If there’s one thing millionaires hate, it’s getting hit with giant tax bills. That’s why a Roth IRA is a great way for future millionaires to invest.
You won’t get an upfront tax break for your Roth IRA contribution. But since you give up the immediate tax break, you get a huge tax break later on. That money will grow and be yours completely tax-free when you retire. Plus you’re allowed to withdraw the contributions (though not the earnings) any time without taxes and penalty.
The Roth IRA contribution limits for both 2020 and 2021 are $6,000 if you’re under 50 or $7,000 if you’re 50 or older. If you didn’t max out your Roth IRA contribution for 2020, you can put your $1,400 toward last year’s contribution up until Tax Day, which was recently pushed back to May 17. Then you can focus on maxing out your contribution for 2021.
4. Only invest it if you won’t touch it for 5-plus years
Millionaires don’t really care how their investments perform today or tomorrow. They’re focused on their results in the next decade and beyond.
They can afford to take a long-term focus because they have ample cash on hand. They don’t put money in the stock market that they may need in an emergency, or that they’re saving for a down payment or their next vacation.
If you think you may need your $1,400 in the next five years, don’t invest it in the stock market. Put it in a high-yield savings account instead. Granted, you’ll barely earn anything in interest right now, but having cash in an emergency fund protects you from having to sell investments at a loss if you’re hit with an unexpected expense.
5. Invest in index funds if you don’t want to research stocks
Getting rich in the stock market doesn’t require you to become an expert stock picker. There are plenty of millionaires who don’t choose their own stocks. Successful investing is more about time, patience, and consistency than it is about picking winners.
If you don’t want to spend the time researching stocks, consider index funds. Your money will grow according to the performance of the stocks in the underlying index. S&P 500 index funds are the most popular form. With S&P 500 index funds, you’re betting on the growth of the U.S. economy. Historically, that’s always been a winning bet over time.
Suppose you invested $1,400 in the S&P 500 index back in 1981, then added $200 a month. Assuming you’d reinvested dividends, you’d have over $1.56 million today.
You may not get the bragging rights you’d get from choosing a winning stock. But S&P 500 index funds are pretty much a surefire way to build wealth as long as you keep your money invested for the long term.
This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.