Interest is one of the most popular forms of investment returns. Although it tends to generate lower returns than capital gains, interest payments generate income and tend to be a safe asset class. This attracts investors, regardless of their investment strategy. Let’s break down how much interest you can earn per year on $750,000.
A financial advisor could help you understand whether income investing is right for your needs and financial goals.
What is interest?
As a fundamental matter, it is important to understand what interest is. Many websites, including financial ones, confuse the topic of “interest” with that of “returns”. They are related, but different concepts.
Interest is money paid on a debt. If you lend money to someone, they will pay you back the loan amount called “principal” and an additional amount as payment for using your money. This is the interest on your loan.
Returns are the money you earn from an investment. For example, if you buy a stock for $10 and sell it for $11, you will have a return of $1. This is contrasted with losses, which represent the amount of money you lose on an investment.
Interest payments are a form of return. If you buy a bond, for example, you will receive interest payments over time. These are your returns on investment. Specifically, interest generates so-called “returns”. This is the income that an investment generates over time. This makes interest-bearing assets particularly popular because you get income for the life of your investment instead of having to wait until the asset is sold.
However, not all returns are interest payments. For example, there is no debt associated with purchasing shares or investing in an options contract. These products generate returns through capital gains, meaning you make money when you sell the asset for more than you paid for it. Interest can lead to returns, but not all returns are based on interest payments.
How much interest can $750,000 generate per year?
Interest tends to be a narrower field than most forms of investment, meaning there are fewer traditional assets that generate interest payments. For the purposes of this article we will avoid discussing private investment options such as taking out a personal loan or lending money to a small business. These may be good and valid investment opportunities, but they are not market-based. When it comes to interpersonal finance or small business lending, you have relatively few legal protections and no market oversight. Exercise your best judgment on a case-by-case basis.
When it comes to traditional assets, however, investors tend to gravitate towards a few notable investments, including:
All of these asset classes generate interest payments, meaning a third party will pay you for a loan. Of these, we won’t address annuities in this piece specifically because they are not one-year instruments. Annuities are products designed for long-term investments. You buy them years, if not decades, before repayment and reap your returns over a similar time frame. There is no meaningful answer to how much you can earn in a year from an annuity, in part because within a year of your initial investment the answer is “nothing.”
However, if you were to invest $750,000 in another major interest-bearing asset, on average here’s what you could expect to earn.
Average annual return: between 5% and 6%
Final value after one year: $795,000
Defining the average performance of the bond market is difficult.
On average, the annual return for bond investors is between 5% and 6%. For example, a Vanguard analysis of its portfolios found that funds consisting of corporate and government bonds generated a return of 5.33%.
However, this figure masks the bond market’s incredible potential for year-over-year volatility. On an individual basis, each bond is one of the safest financial assets you can buy. A government bond is backed by the full faith and credit of the U.S. government, while corporate bonds are backed by the assets of the entire company. It is rare for a well-rated bond to default.
However, the average returns in this market are a completely different story. New bonds are issued every year based on current market conditions. This leads to average annual returns ranging from 0.93% in 2021 to 23.33% in 2009, but also includes years like 2018 where the market generated an average return of -2.76%.
Predicting the bond market as a whole can be difficult. That said, for an interest/income investor this is still one of the strongest assets you can choose.
Certificates of Deposit
Average annual return: between 0.60% and 3.5%
Final value after one year: $776,250
Certificates of deposit are a specialized form of bank account. With this product you deposit a certain amount of money at the bank for a specific period. For example, if you purchase a 12-month certificate of deposit it means you have deposited your money for 12 months. It cannot be collected or accessed during this period.
When the certificate expires, you will receive your entire initial investment back plus a certain amount of interest. This is your payment for allowing the bank to freeze your money.
Certificates of deposit pay variable interest rates based on how much you invest and when the certificate matures. The more money you deposit and the longer the maturity of your certificate, the higher the interest rate you will receive. As of this writing, the FDIC reported a national average of 0.60% for 12-month certificates of deposit. But it’s important to note that this is just the national average. Many individual banks offer higher rates, and investors with more money can generally access better deals.
With $750,000 to invest, you should be able to find interest rates between 3% and 3.5%, leaving you with $776,250 at the end of the year.
Money market funds
Average annual return: between 2% and 3%
Final value after one year: $772,500
Money market funds are income-generating mutual funds or exchange-traded funds (ETFs). These funds invest exclusively in short-term, highly liquid debt assets. For example, they may purchase short-term Treasury securities, certificates of deposit, or corporate bonds with very short maturity dates.
The objective of a money market fund is twofold: first, they aim to generate interest-based income based on their basket of investments. Secondly, they aim to create an extremely low volatility portfolio. Investing in short-term assets helps money market funds reduce volatility because it means they can almost always predict cash flow in the immediate future. In other words, with short-term assets there is less risk of something unpredictable happening over time.
The trade-off with this type of stability tends to be low returns. Money market funds tend to earn less than other forms of mutual funds or ETFs. This can pose a particular risk for investors in high-inflation environments, as your portfolio could end up losing ground relative to the value of your money.
High yield savings
Average annual return: 2.5%
Final value after one year: $768,966
A high-yield savings account is a specific form of deposit bank account. In many ways it works like a regular savings account. You keep your money at the bank and in return they pay you an interest rate based on your funds on deposit. Most institutions pay you monthly, allowing your interest to compound over time.
Like a regular savings account, a high-yield savings account will have some rules about withdrawals. You can typically only transfer money from this account a limited number of times per month. Additionally, with a high-yield product, your bank will often require you to maintain a minimum account balance.
Most people don’t consider high-yield accounts so much an investment product as a nice addition to their financial planning. If you plan to keep a large amount of money on deposit anyway, you may also earn some additional interest from it. However, it’s worth considering that a good high-yield savings account can often generate better returns than many certificates of deposit or money market funds, while also leaving you with more flexibility than either product.
If you have $750,000 to invest, interest-bearing products can often give you a strong balance between income and security. Whether you choose bonds, annuities or bank accounts, it’s worth considering the range of options.
Tips for investing
A financial advisor helps you create a financial plan for your investment goals. SmartAsset’s free tool matches you with up to three financial advisors who serve your area, and you can interview your advisors at no cost to decide which one is right for you. If you’re ready to find an advisor who can help you reach your financial goals, start now.
For many consumers, the primary way to generate interest is through their bank account. While this is often a negligible amount of money, if you choose the right bank the payments can add up.
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