Money opportunities are usually buried at the gravesite of procrastination. It takes discipline to see an idea through to its conclusion – your personal benefit. And when most of us dream about making more money, we usually procrastinate instead of achieving the goal.
We spend too much time dreaming about the money we wish we had instead of taking steps to get it. Some people religiously buy Lotto tickets. I knew a guy who regularly went to seminars offered by infomercial gurus promising the secrets to success and wealth. But too many of us dream about and spend imaginary riches instead of realistically attaining them. How many times have you heard that making $1 million is the hardest part of being a millionaire? Or that after making a million, you can just live off the interest without touching the principal?
Some things are easier said than done. And one of those things is attaining millionaire status while living a working-class lifestyle.
And yet, we dream of instant wealth instead of devising a long-term approach to getting it. I had a friend who would openly hallucinate about the mansions, yachts, and cars he would buy when he became rich.
Meanwhile, he begged everyone he knew for gas money for a car that eventually got repossessed.
Financial independence is a mindset. Money is a tool to navigate life, not a means within itself. Money gives you options.
What do I mean by that?
To Live Off the Interest on $1 Million You Must Make a Million First
Well, the people who ask “can I live off the interest on a $1 million?” usually aren’t millionaires. Millionaires know the answer to this question. And they are more concerned with retaining and expanding their existing wealth than engaging in rhetorical debates about creating it in the first place.
So, let’s answer that question. Can you live off the interest on $1 million? It depends on personal finances, how much money you have, and your standard of living.
Before we get into all of that, we need to discuss compound interest.
And finally, I’ll list some strategies to help you make that first $1 million.
What is Compound Interest?
Compound interest is the interest that you accrue on the principal, the amount of money saved or invested, and the interest. With compound interest, you generate interest on interest.
When you take advantage of compound interest, your interest will grow faster over a longer period of time.
Look at it this way. A typical savings account pays 0.06% interest monthly. Compound interest can be applied daily, monthly, or annually to the principal interest depending on the financial institution.
For the sake of simplicity, let’s say you have $10,000 saved in a savings account. The interest rate is 1% annually, a little more than the standard. If the interest is compounded daily, then you will accrue $101 after one year. Then, you will generate $102 in the next year. After a decade, you will have $1,052 generated due to compound interest.
The interest rates for compound interest are higher in CDs, Roth IRAs, and traditional IRAs.
OK, so can you live off of the interest on $1 million?
Can You Live Off of the Interest on $1 Million?
Before we answer that question, you need to ask yourself some questions.
Do you live in an area with a high standard of living? What is your tax bracket? What are your daily, monthly, and annual expenses? Do you owe significant debt?
The average two-person household has an annual budget expense of about $67,000 annually. A four-person household has yearly budgetary expenses of $85,000.
Now let’s imagine that you just earned $1 million, and you put it in a bank account. (How here is a compound interest calculator to help make calculations.)
To live off of the interest means that you never touch the principal.
So, you should never withdraw the $1 million you have saved.
And it takes time for compound interest to accrue. It could take years or decades to live off the interest if you don’t have other sources of revenue or investments.
Imagine that you add $200 to the account every month at 0.06% interest with daily compound interest. After a year, you will have $1,003,001. After a decade, you would have $1,030,091.
Now let’s imagine the interest is 0.31%. After a year, you would have $1,005,509. And after a decade, you would have $1,055,865.
You could live off the interest if you contributed as much as possible monthly, had a higher interest rate, and never touched the principal.
And this is assuming that you are free of debt and have other sources of income.
Get a Plan and a Financial Advisor
If your annual expenses are $67,000, you owe significant debts, don’t have other revenue sources, contribute minimally, and never touch the principal, you won’t be able to live off of the interest on $1 million for years.
Or a decade, at the least.
Get out of debt.
Live well below your means.
Save money every day.
Make good investments.
Start a business based on your expertise or skills.
Stay dedicated and disciplined.
Try to earn $10,000, then $100,000, and incrementally work your way to earning $1 million.
Hire a good financial advisor to help you.
Create opportunities to attain wealth. Or you will spend forever daydreaming about the money you will never have.
Allen Francis was an academic advisor, librarian, and college adjunct for many years with no money, no financial literacy, and no responsibility when he had money. To him, the phrase “personal finance,” contains the power that anyone has to grow their own wealth. Allen is an advocate of best personal financial practices including focusing on your needs instead of your wants, asking for help when you need it, saving and investing in your own small business.