How much money you have does not matter as much as what you do with it strategically and financially. The point is that context is everything. For example, if you had a million dollars, the general wisdom is to never touch the principal and just live off the interest. Is it that simple? How much interest will I earn on $1 million?
You know, you really can’t retire off of a million-dollar nest egg unless you live in an extremely low cost of living area. Or retire to a developing country.
A $1 million retirement will last 8 years in San Francisco and 45 years in Memphis, Tennessee.
A $1 million nest egg won’t go far in a large metropolitan city. Some financial experts believe $3 million is the new version of $1 million when you consider inflation and the rising cost of living in the 21st century.
The point is that context is everything. Especially when it comes to accruing interest on large sums of money.
You could live off the interest on millions of dollars. But it would take years or decades to realistically live off of the interest on a million dollars.
Yes, there are caveats to the rule, but it would depend on strategic investment or savings methods.
“If I had a million dollars I would buy…” We all have thought about it, talked about what we would do. And then we always say “I would just live off the interest!” as if that would pay your living expenses forever.
But can you really “live off the interest”? How much interest will I earn on 1 Million dollars?
How Much Interest Will I Earn On 1 Million Dollars?
Well, that depends on where you put your money.
Have you invested $1 million wisely?
Perhaps you have $1 million squirreled away in a savings account.
Maybe you invested $1 million in a treasury bond or a CD.
The method by which you invest $1 million will determine how much interest is generated. And, the time it takes for appreciable interest to accrue.
How much interest can be generated on $1 million? Again, it depends.
So let’s break down the places you can have your money and how much interest you’ll get from each.
The interest rates you get with checking or savings accounts are modest and will not generate high returns in a hurry.
The average checking account interest rate is about 0.03%. And for savings accounts, it’s about 0.06%. Check here for tips on how to get and earn high interest savings account. And now there are many online bank accounts with zero or low maintenance fees.
Depending on your bank, your deposit will generate compound interest. Compound interest is the generation of interest on interest as well as the principal. Interest can be compounded on a daily, weekly, biweekly, monthly, quarterly, or annual basis, depending on the bank.
So, let’s keep this as simple as possible. Let’s imagine you have $1 million in a bank account. If the daily compound interest was 5%, and you don’t contribute, then you would have $1,051,268 after a year.
Sounds great. But remember, it will take you a year to accrue that interest. You couldn’t begin to live off that $51,268 interest on $1 million for a year at least.
And you would need to live on a budget to live on $50,000 annually in a big city. And that is assuming $50,000 would support one person. It may not be enough to pay the living expenses for a couple or family for an entire year.
But if you can wait a decade, you will generate over $648,665 at 5% daily compound interest on that $1 million.
Still, 5% interest on a bank account is not the norm. At 0.03% annual compound interest, you will generate $300 on $1 million. Or, about $3,000 after a decade.
How about 0.06% compound interest? it would be $600 after a year or $6,017 after a decade. If you want to know “How much interest will I earn on $1 million?” well, it will be modest.
Here is a handy compound interest calculator for you to calculate yourself and compare rates.
Certificate of Deposit (CD)
If you want to know “How much interest will I earn on $1 million?” it could be a nice amount with a CD.
A certificate of deposit, commonly known as a CD, is a kind of a hybrid financial product. It’s kind of like a limited investment opportunity and a bank account rolled into one.
A certificate of deposit is a kind of bank account that you volunteer not to access for a predetermined period of time for a more beneficial interest rate. Improved interest rates are supposed to compensate for the temporary loss of liquidity.
Most CDs are offered for one month, a couple of months, and up to 60 months, or 5 years. And the interest rates can range between 0.35% to about 1.10%.
Most financial institutions will require a $500 to $1,500 minimum deposit to open a CD.
Keep in mind that when you apply for a CD, you can’t touch the money until the maturity date. If your CD is for 60 months and you withdraw money after a month, you will be hit with penalty fees.
A CD with a longer maturity date will offer a much higher yield than a one-month or 3 month CD. And CDs offer relatively higher interest rates than traditional bank accounts. They also have shorter maturity dates that pay back interest returns quicker than long-term treasury bonds.
So, if you saved $1 million in CD for 5 years at 1.10%, you would generate over $56, 224 in interest returns. Not bad at all.
Money Market Accounts
A money market account is a kind of hybrid form of a checking and savings account. You will be limited on the number of bank transactions you can perform, about six per month, with a money markets account.
Interest is money paid regularly at a particular rate for the use of money lent. In other words, interest is money paid to you for allowing others to use your money.
The thing is that with a money markets account, the interest rate can increase or decrease in tandem with the activities of the financial market, hence the name.
The average interest rate for a money markets account is about 0.07%, almost the same as a traditional bank account. However, the more money you have in a money markets account, the higher your interest rate.
So, if you have $1 million in a money market account at 0.07%, and compounded annually, you will generate $701 after a year. Or $7,023 after a decade.
You can generate interest from a million dollars, but it will take time.
And you need a million dollars before you can daydream about the interest you will make off of it.
Start saving money now. Try using Digit for efficient saving. Pay down your debts. Live below your means. And look for legitimate investment and business launching opportunities.
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.