How much interest will I earn on 1 million dollars?

Answer 1

Depends upon what the interest rate is at the savings institution at the time. You will have to check with local banks for the rates being offered. They seem to change daily. The factors that will determine how much you will earn on your million pounds are: # The interest rate # How long you save it for without withdrawing any money # Whether you are paid interest daily, monthly or annually == The higher the interest rate, the more your £1,000,000 will earn you in a year: * A 4% interest rate paid annually will earn you £40,742 * A 6% interest rate paid annually will earn you £61,678 Over one year, the maths is not surprising. Keep your million safe and untouched for 30 years though and even a 2% difference will have a huge consequences, as we'll see below. == The longer you leave your million untouched, the more money you'll have at the end. This is due to compound interest, which really increases over long periods of time. * Compound interest means you get interest on your interest The longer you leave your money untouched, the more the interest rolls up and grows, as you get interest on the original interest, and then interest on the interest ON the original interest, and so on. We'll see the difference it makes below. == The interest due on your headline annual interest rate of, say, 4%, can be calculated and paid by your bank on a daily, monthly or annual basis. Having smaller amounts of interest paid more regularly is better than having a once-a-year lump sum. I'll assume below that your interest compounds monthly, as this is the most normal in my experience. == First, let's assume an interest rate of 4%, compounded monthly. Your million pounds will have earned: 1 day: £110

1 month: £3,333

1 year: £40,742

5 years: £220,997

10 years: £490,833

20 years: £1,222,582

30 years: £2,313,498 What about a higher interest rate of 6%, compounded monthly? 1 year: £61,678

5 years: £348,850

10 years: £819,397

20 years: £2,310,204

30 years: £5,022,575 These results show two things: # A small difference in the interest rate makes a big difference # Compound interest can grow your money by a huge amount over time To illustrate the first point, look at the amount earned after 20 years - the 6% account has earned almost twice as much as the 4% paying account. That's a huge difference from such a seemingly tiny 2% difference. As for the second point, look at the amount of money you have after 30 years at 6% interest - £5 million! Remember, you'd have your original £1 million, too, which means you'd have over £6 million to your name. I remember the first time I encountered compound interest - I was reading an article exactly like this one I've just written, but in a magazine in a newsagent rather than on a PC screen. I almost dropped the magazine in shock. The ability of money to roll up like this still seems to me the most amazingly motivating thing about saving and investing. Another example - if you were a 20-year old singer who recorded one hit single tomorrow, topped the charts, made a million then stuck your money in the bank at 6% and resisted the temptation to spend it on wine, women and designer jeans, you could retire at 65 with nearly £14,000,000! The bottom line: Working out how much you will earn on a million is a nice problem to have. What if you tried to live off the annual earnings of that million rather than letting it build up? Things would be rather bleaker. The most you'd ever earn is the annual interest - £40,000 a year from the 4% interest rate. Nice, but it's hardly going to fund a millionaire lifestyle. Your million would never get compounded because you'd always be spending the interest. You'd also have to pay taxon your interest. Tax varies around the world, but in the UK you'd pay between 20 and 40% tax on most of that income. (One reason why it pays to start saving in an ISA). Worse, inflation will reduce the buying power of your £1,000,000. Inflation, which tends to run at about 2-3% a year, would make both your million and the earnings on it worth less in real terms over time. You'd still be earning £40,000 in 20 years on your million pounds, but it would buy less stuff. All other things being equal, you'd be able to afford far fewer bottles of wine or designer jeans. Inflation is the main reason why living of the interest of a million pounds is not very realistic. You're better off spreading your million between various income producing assets such as cash, bonds, dividend-paying shares, and property that you rent out. From moment you diversify into these 'real assets' your net worth will fluctuate in value, which can be painful, especially in a down market. But your investment income should be inflation-protected over the long-term. There are also various tax benefits from dividend income compared to cash savings. Obviously this sort of thing requires specialist financial advice, but there's no harm dreaming in advance!