How Much Interest Would $1,000,000 Yield?
Someone happened upon this site today by Googling ”how much interest would i get if i put in $1000000 savings.” Interesting question, and as soon as I saw it, I did the math. Here’s the thing, though. You have to define “savings.” I’m going to assume the searcher meant “savings account.” But even then, are we talking regular brick-and-mortar bank savings account, or a high-yield savings account?
Let’s assume you put the money in a savings account, and took out the interest every year to live on.
$1,000,000 in a brick-and-mortar savings account, earning 0.02% a year (pretty standard), would earn only $2,000 - could you live on that?
$1,000,000 in a savings account earning 5% a year would yield $50,000. How about $50,000 - could you live on that?
Most banks offer an account that will pay you a higher interest rate if you keep a significant amount of money in the account - $1,000,000 certainly counts as a “significant amount.” For example, Bank of America offers a Money Market Savings Account that would pay 3.95% on $1,000,000 - thus yielding $39,500 on your cool million.
What about insurance? Well, the Bank of America account says it’s FDIC insured “to the maximum amount allowed by law.” I’m not really sure how much that is, but I do know that most online high-yield savings accounts are insured up to $100,000. Maybe you should just spread your million out between savings accounts at ten different banks!
Still, the Bank of America money market account doesn’t give you as good of a rate as an online savings account: ING’s Orange Savings offers 4.3% APY on any balance - whether you’ve got $1 or $1,000,000 in there.
Ideally, though, if you have a million dollars, you might want to look into investing it in something a little more aggressive than a savings account, especially if you’re young and you don’t have to live off the money.
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FDIC Insurance is 100% up to $100,000 on deposits. Usually when a bank goes bankrupt, however, the govt. tries to refund as much as they can beyond the initial $100,000. I really wouldn’t worry about Bank of America going bankrupt, though. It’s one of those banks that ppl call TBTF or Too Big to Fail, the govt. would most likely not let it go under in the first place b/c of how it would affect the rest of the economy.
Anyway, if you want to know anything else about the FDIC, check out http://www.fdic.gov/deposit/deposits/insuringdeposits/index.html .
Comment by Jenn — April 4, 2007 @ 6:22 pm
Ya that discussion came up between myself and my coworkers. We were talking about if we won the lottery and put a chunk of it into a high yield savings and lived off the interest. One question on that tho…how much would you get taxed when you’re making that much on the interest? The actual money you get will probably be less than 50k from 5% on 1 mil. So i guess just do what you said and invest more aggressively and problem solved! =D
-New2TheRatRace
http://new2theratrace.blogspot.com/
Comment by New2TheRatRace — April 4, 2007 @ 6:37 pm
Shouldn’t you calculate the interest as a monthly compounding interest?
I believe standard savings accounts will yield monthly interest, and the following month’s interest is calculated based on the principal + interest from previous month even if there are no additions to the principal. So shouldn’t the total interest earned at the at of the year be a little bit more?
Also, when I calculate the interest on $1,000,000 for 0.02% (.0002) compounded monthly, I get $1,000,200.02 at the end of the year. (I get your figure of ~$2000 at the end of the year given the interest rate of .2% [.002])
When I calculate the interest on $1,000,000 for 5% (.05) compounded monthly, I get $1,051,161.90 at the end of the year.
I used this compound interest calculator
Comment by acidspit — April 4, 2007 @ 6:42 pm
I think for the 5%, she meant APY and not APR. From my understanding, APY incorporates the monthly interest you earn. So, 5% APY means you earn 5% total at the end of the year. My current Wamu savings states its 5% APY and 4.89% interest rate.
-New2TheRatRace
http://new2theratrace.blogspot.com/
Comment by New2TheRatRace — April 4, 2007 @ 7:09 pm
Jenn,
Thanks for the FDIC info! I agree that BoA is unlikely to fall, but then again, I can’t predict the future! Anything could happen.
Acidspit
Yep, like New2TheRatRace said, I was was referring to APY. For the BoA account, for example, the monthly interest rate is 3.88%.
New2TheRatRace,
Interesting question, bringing taxes into it. Your tax bracket would depend on how much other money you had. But yes, I assume it would be rather high, regardless, so you might want to be a little more aggressive with your million!
Comment by Stephanie — April 4, 2007 @ 8:58 pm
At a $1MM, two things happen:
1) You get a much higher interest rate from banks
and
2) You qualify as a high networth individual, and there are financial planners who want to talk to you.
Essentially, in both cases, you are looking at 8-10% interest rates (the difference being APR vs. APY, plus some risk).
In terms of taxes, interest tax is your tax bracket, whereas capital gains taxes (through investments) are set @ 15%, unless you are in the bottom tow income brackets.
So the difference between savings vs. investment after tax could be 3% vs. 7%, and that’s just one year.
Compound that over 10 years (on APY basis), and your investment would have doubled your money, while savings is still at $1.4MM. Also, the $2MM from investments assume you cash out your investments every year. If you waited until the end of 10 years to sell your investments, it could be evenmore.
Comment by Finance Guy — April 4, 2007 @ 11:48 pm
[...] the reality of taxes and inflation. In the meantime, Poorer Than You ponders how much interest $1,000,000 in savings will return. Let’s say it’s not too [...]
Pingback by Money Articles and Personal Finance Picks, “I Want To Get A Promotion” Edition » Silicon Valley Blog About Money — April 7, 2007 @ 12:40 pm
FDIC insurance wouldn’t cover any more for multiple savings accounts at the same bank.
You would need to spread the 1 mil around to 10 different banks (100,000 at each).
Comment by penty — April 10, 2007 @ 2:07 am
probably about 10 million times more likely the bank will fail before you win the lottery. so keep buying those tickets, sucka
Comment by ryan — December 4, 2007 @ 8:33 pm
Ya know,peaple that rag on the lottery are right up to a point.If you spend alot on the lottery you are a sucka but a little is worth it.
I never played 9 yrs ago my co-worker won 10mil 5 yrs ago I got 5 out of 6 #’s on a 15mil pot,so you never know.
Comment by Eddie — February 10, 2008 @ 12:29 am
Finance Guy is wrong, you do NOT get a “much higher rate” from the banks because you have $1mil. You get preferential treatment along with possibly a slightly higher rate, but not much more.
Also, a couple can get $300,000 FDIC protection with one bank by having 3 separate accounts, one in each name and one joint account, each one fully protected.
Comment by DeeOhGee — March 4, 2008 @ 9:26 am
In this current situation, Does no one out there find it sad that the bank is making 16% of the money we the people place inside it and we the people only get 2% interest from the bank? Something is truly wrong with this system.
Comment by Wayne Smith — March 4, 2008 @ 5:53 pm
You will make the biggest mistake to bank with Bank of America.
This bank will rip you off big time. Check this link out.
http://www.google.com/search?q=Bank+of+America+Class+Action+Lawsuit&sourceid=navclient-ff&ie=UTF-8&rlz=1B3GGGL_enUS274
Comment by Jah — September 2, 2008 @ 9:59 am