If you won a million dollars tomorrow, how much interest could you make each year in interest by investing it? Would it be enough to live off of? There are a few different factors to take into consideration when determining this:
How high is the interest rate?
The higher the rate, the better. Even slight differences matter; over time, the small differences will turn into large differences in sums of money.
How long has the money been invested?
The longer it has been invested, the better. Compound interest works wonders over long periods of time. Here is an example of how much interest one million dollars would make in a year at a few different points based on a 4 percent interest rate compounded monthly.
- One Year – $40,741.54
- Five Years – $220,996.59
- Ten Years – $490,832.68
- Twenty Years – $1,222,582.09
As you can see, there a is huge difference in annual interest even from year one to year five. The interest earned from year one compared to year twenty is inconsequential.
How often is the money compounded?
The more often it is compounded, the better. Is it yearly, quarterly, monthly, or daily? Daily would have the greatest returns, and monthly would also be a good situation.
It doesn’t take long for the interest to start to really build up, especially when compounded regularly. It is also very possible to score a high interest rate- even higher than 4%. With all factors taken into consideration, it seems that there is no specific answer of how much interest your money could earn.
How do you plan to invest the money and what are you going to do with it?
Here are a few different routes for investing.
- Bonds: Bonds are tricky, because although they can yield large amounts of money, they take time to mature. The first year that your money was invested you wouldn’t see as much of a profit. However, twenty-five years into the future you may make much more money. If you invest your million dollars in high quality tax free bonds currently paying 4%, you would earn an annual sum of about $40,0000 during the year.
- Preferred Stocks: Although they aren’t guaranteed, these could provide steady income. You are protected from inflation, but the market has highs and lows; know your risks.
- Annuities: A fixed annuity can provide the guarantee of income that others can’t; it just needs to be made with a strong insurance company. They are great for lifetime income, but do not grow or change.
Make sure to ask yourself if you are getting a fair share of investment returns.
Sit down with a professional and sort through your best options. There are always both pros and cons, and you should weigh all of your options before deciding. Be smart with your money and make wise choices when investing.