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Personal Finance

How Much Interest Would You Earn on a Million Dollars?

“If only I had a million dollars in the bank.” Who hasn’t pondered that at one time or another? But have you ever wondered how much interest one million dollars earns per year? 

Interest rates on savings vehicles are currently still pretty low, according to the Federal Deposit Insurance Corporation (FDIC). As of February 3rd 2021, the average rate nationally on savings accounts is 0.05% APY and 0.06% APY for jumbo ($100,000 deposit or more) money market accounts.

Scroll down to see how much interest you might generate with various savings vehicles.

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Interest on a Million Dollars: Various Savings Vehicles

Investing in the Stock Market

There are many ways to invest in the stock market. You can pick individual stocks, invest in a diversified portfolio through an ETF or mutual fund, or passively invest your money through a robo-advisor.

According to Investopedia, the average annual return from the S&P 500 since its inception has been around 10%. So, if you invested your $1,000,000, it would generate $100,000 in interest in the first year ($1,000,000 X 0.10 = $100,000). If you let it compound annually for 10 years, you would generate $1,593,742 in returns for a total of over $2,1593,742.

High-Interest Savings Accounts

The advent of online-only banking has created an entirely new field of competitive savings accounts featuring high interest rates, which are generally reserved for intermediate-term savings or emergency funds.

The absence of brick-and-mortar locations and staff to operate them have reduced the overhead costs of these banks who then pass those savings to their customers in the form of higher interest rates and low or no fees.

As an example, Chime Bank offers a high-interest savings account with an APY of 0.50%, as of February 3rd 2021. That would translate into $5,000 of interest on one million dollars after a year of monthly compounding. The 10-year earnings would be $51,140.13.

The rates on both traditional and high-interest savings accounts are variable, which means the rates can go up or down over time. These earnings projections are based on the initial rate, which is likely to change.

Bank Savings Accounts

Traditional savings accounts, generally reserved for short-term savings, available at banks generally yield low rates of interest. As noted above, the average rate on savings accounts as of February 3rd 2021, is 0.05% APY.

A million-dollar deposit with that APY would generate $500 of interest after one year ($1,000,000 X 0.0005 = $500). If left to compound monthly for 10 years, it would generate $5,011.27.

Certificates of Deposit

Certificates of Deposits (CDs) are time deposits that pay higher interest rates the longer the money is held on deposit. These are great if you need the money after a certain short-term time period. The money must remain on deposit for the entire length of the CD term or you will forfeit a portion of your interest earnings.

As of February 3rd, 2021, the average rate on a jumbo 24-month CD is 0.21% APY. The interest earned on this would be $4,204.41.

When the CD matures it must be rolled into another CD to continue earning interest. Generally, if you think interest rates will increase significantly in the next few years, you might be better off choosing a short-term CD (12 months or less) so it can be rolled over into a higher-yielding CD after rates have risen.

Treasury Savings Bonds

Treasury savings bonds offering fairly decent rates of interest can be purchased directly from the U.S. Treasury Department. For example, the I Savings Bond currently yields 1.68%, which can be held for 30 years and redeemed without penalty after five years. The problem is the maximum purchase of Treasury savings bonds is limited to $10,000 per calendar year.

There are also other options that you may want to consider depending on the markets such as Treasury Inflation-Protected Securities (TIPS). TIPS can be purchased up to $5 million in 5-, 10-, and 30-year maturities. They can be held to maturity or sold on the open market for current market value. TIPS pay a fixed interest rate which is adjusted each year for inflation.

Final Thoughts

It is important to keep in mind that there are coupons that are paid on some bonds that trigger taxes along the way. Also, while it may be an insignificant amount of money, there are capital gains taxes that are assessed on savings and CDs.

>> Read More: How much do you need to live off interest?