Does interest off 1 million dollars seem like it would provide plenty of income for life?
In this article, I’m going to show you how much interest income you’ll get from a million dollars.
Let’s face it; a million dollars sounds cool. So we’ll use it as the foundation for this post.
Many people spend their entire lives chasing the goal of having a million dollars. You’ll probably discover that the interest off 1 million will be much less than you may have thought.
Before calculating the interest off 1 million, I want to explain some important risk reward aspects involved here.
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Interest Off 1 Million Defined
First, let’s define interest. Interest is the term that is generally used for the cost of borrowing money. Interest is most often associated with bank saving accounts, money market funds and bonds.
But interest is also used loosely to refer to investment income. Investment income usually refers to stocks. And if you had a million dollars, you’d probably have at least some of your money in stocks.
But for this purpose of this article, we’ll stick with the real meaning of interest. Interest is the cost of borrowing by my definition.
The reality is that you’ll want to know everything in this post if you have ANY money anyway. This is because you’ll almost certainly have at least some of it in money market funds or bonds.
How You Can Earn Interest Off 1 Million Dollars
Let’s say you’ve finally got your million dollars. How will you earn interest on your money?
There are two common ways to earn interest, and a few more alternative investments that pay interest. Most traditional investors earn interest from money market funds or from bonds.
The major difference between money market funds and bonds is time.
In the case of your million dollars in a money market fund at your bank or brokerage firm, you’re sort of loaning the bank your money. The bank is paying you interest for the use of your money. It is the bank’s cost of borrowing from you.
The same thing happens with bonds, but usually for a longer time frame.
How Much Is the Interest Off 1 Million?
First, the length of time that money is loaned affects the interest rate. This is because the longer you loan money for, the more you’ll get paid.
Think of it this way. Let’s say someone wants to pay you 1% interest off 1 million dollars for thirty years. But you know that interest rates vary over time.
You think interest rates may go up over 30 years, and you could earn more interest. In this case, you’d be reluctant to take that deal. You might agree to taking interest at that low rate for maybe a year or two, right?
You’re The Bank
Remember, when you “buy” a debt instrument, like a bond, you’re making the loan. This sounds a bit tricky I know, but it’s also pretty cool.
As an investor, it’s good to be the one making the loan. When you do, you get paid interest, instead of paying interest! Be the bank!
In being the bank, you’ll want to earn the most interest you can, at the lowest cost, and lowest risk so keep reading.
Ways You Can Earn Interest Off 1 Million
As mentioned, you can earn interest several ways, but bonds is one of the most common way.
You’re already familiar with the term bonds. With bonds, you’re loaning money to the government, or another entity.
Sounds simple enough, right? But financial lingo can make simple concepts seem confusing. Here is what I mean; the terms bills, notes and bonds are used for these loans you can make. And the time frame for these loans will determine the interest off 1 million dollars, so you’ve got to know this.
- Bills are less than two years
- Notes are less two to ten years
- Bonds are ten to 30 years
How to Get the Most Interest Off 1 Million Dollars
How much interest can you get off your million dollars? And how can you get the most interest based o what you’ve seen so far here?
You guessed it! If you buy a thirty year bond you’ll get more interest than if you buy a one year note.
Now knowing that you can get more interest off the thirty year bond, you’d want it, right? This will depend on whether or not you mind if the value of your million account swings up and down.
The Scary Bit About Bond Interest Off 1 Million
When interest rates rise, the value of bonds goes down. This is pretty much a bummer since you have no control over interest rates. This is a reality that many investors don’t realize!
The good news is that when interest rates go down, the value of longer term bonds increases. This is because those bonds that pay the old, higher rates are more valuable. Investing is actually pretty logical.
You can see how important it is for you to be aware of where interest rates are in comparison to history.
Now we’ll calculate the interest off 1 million since I have clarified that:
- It’s good to get paid interest instead of paying interest
- You get paid more for long term bonds
- There are several terms used for bond type if investments
- Longer term bonds go down in value when interest rates rise and vice versa
How To Get Higher Interest Off 1 Million
The important thing to remember is that in general, the higher the interest you get paid, the more risk there is. This is because any lender would want to be compensated for extra risk.
The quality of the lender also affects the interest rates. Naturally, the higher the quality of the lender, the higher the return. This means that by buying bonds in a lower quality company, you can get a higher interest rate. The same is true for countries that are considered riskier.
Even though the US Government has enormous debt, US Treasury bonds are still considered extremely safe. In fact, during times of extreme uncertainty and fear, Treasuries usually rise. For this reason, many investors use bonds to reduce risk in their portfolios.
Investing is always a balancing act between risk and reward. This is why it’s important for you to know what your goals are, and how much risk you want to take.
The Interest Off 1 Million
Interest rates have been very low for a long time as I write this. You could earn a realistic 1.3% on your money in a very safe, short term money market account. These days most people have their “cash” in some sort of money market fund.
Remember there are fees for the money market fund. A safe estimate for fees would be about .50, although fees vary greatly.
♦ 1.3% interest less the expenses of .50% is .8% net earnings after fees but before taxes.
♦ $1,000,000 times .08 equals $8,000 a year interest income. This is $666.67 a month interest income.
Let’s look at the math earning 3% on a ten year bond fund with a similar expense.
♦ 3% interest less the expenses of .50% is 2.5% net earnings after fees but before taxes.
♦ $1,000,000 times 2.5% equals $25,000 a year interest income. This equals $2,083.33 a month interest income.
As you can see, the interest off 1 million is not enough for most people to live well in the US. This is why most people also invest in other assets. Unfortunately, even the dividend income from the S&P 500 stock index also pays only around 2%. The income generated from stocks and bonds is very low. Our quest for income led us to create multiple income streams from stocks, real estate and small business. In this free eBook, I share our 9 favorite low risk income and wealth building strategies.
Watch This Video Below on “Retirement Income From a Million Dollars”