Interest is one of the most popular forms of investment return. Although it tends to generate lower returns than capital gains, interest payments are both income-generating and tend to be a safe asset class. This appeals to investors no matter what their investment strategy. Let’s break down how much interest you can earn per year on $750,000.
A financial advisor could help you figure out if income investing is a good fit for your financial needs and goals.
What Is Interest?
As a threshold matter, it’s important to understand what interest is. Many websites, even financial sites, confuse the subject of “interest” and “returns.” They are related, but different, concepts.
Interest is money paid based on a debt. If you lend someone money, they pay you back the amount of the loan known as the “principal” and an additional amount as payment for using your money. This is the interest on your loan.
Returns are the money that you make back on an investment. For example, if you buy a stock for $10 and sell it for $11, you have $1 worth of returns. This is as opposed to losses, which is the amount of money that you lose on an investment.
Interest payments are a form of returns. If you buy a bond, for example, you receive interest payments over time. These are your returns on the investment. Specifically, interest generates what are known as “yields.” This is income that an investment generates over time. This makes interest-bearing assets particularly popular because you get income over the lifetime of your investment as opposed to having to wait until you sell the asset.
Not all returns are interest payments though. For example, there is no debt involved with buying a stock or investing in an options contract. Those products generate returns through capital gains, meaning that 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 that there are fewer mainstream assets that generate interest payments. For the purposes of this article we will avoid discussing private investment options such as extending a personal loan or lending money to a small business. Those can be fine and viable 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 mainstream assets, though, investors tend to gravitate toward a few major investments, including:
All of these asset classes generate interest payments, meaning a third party will pay you for a loan. Of these, we will not address annuities in this piece specifically because they are not one-year instruments. Annuities are products designed for long-term investing. You buy them years, if not decades, in advance of repayment and collect your returns over a similar time frame. There is no meaningful answer to how much you can make in one year off of 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 is what you could expect to earn.
Bonds
Average Annual Return: Between 5% and 6%
Final Value After One Year: $795,000
Nailing down the average performance of the bond market is difficult.
On average, the annual return for bond investors falls somewhere between 5% and 6%. For example, a Vanguard analysis of their own portfolios found that funds built out of corporate and government bonds generated a 5.33% return.
This figure masks the staggering potential for year-over-year volatility of the bond market though. On an individual basis, any given 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 corporation. It is rare for a well-rated bond to default.
However average returns across this market are a different story altogether. Each year, new bonds are issued based on current market conditions. This leads to average annual returns that range 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 overall can be difficult. That said, for an interest/income investor this is still one of the strongest assets you can pick.
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 place a given amount of money on deposit with the bank for a specific time. For example, if you buy a 12 month certificate of deposit it means you have placed your money on deposit for 12 months. You cannot withdraw or access it during this time.
When the certificate expires, you receive back your entire initial investment plus a given amount of interest. This is your payment for letting the bank lock up your money.
Certificates of deposit pay variable interest rates based on how much you invest and the maturity of the certificate. The more money you put in and the longer your certificate’s maturity, the higher the interest rate you will receive. At time of 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 than this, and investors with more money can generally access better offers.
With $750,000 to invest, you should be able to find interest rates somewhere 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, high-liquidity debt assets. For example, they may buy short term Treasury bonds, certificates of deposit or corporate bonds with very short maturity dates.
The goal of a money market fund is twofold: First, they aim to generate interest-based income based on their basket of investments. Second, 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 their cash flow in the immediate future. In other words, with shorter-term assets there’s less risk of something unpredictable happening over time.
The tradeoff to this kind of stability tends to be low returns. Money market funds tend to make less money than other forms of mutual funds or ETFs. This can be a particular risk for investors in high-inflation environments, as your portfolio may end up losing ground relative to the value of 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 depository bank account. In most respects it works like an ordinary savings account. You hold your money with the bank and in exchange 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 an ordinary savings account, a high-yield savings account will have some rules around withdrawals. You generally can only move money out of this account a limited number of times per month. In addition, with a high-yield product, your bank will often require you to maintain a minimum balance in the account.
Most people don’t consider high-yield accounts an investment product so much as a nice addition to their financial planning. If you are going to hold a large amount of money on deposit anyway, you might as well generate some additional interest off of 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 of those products.
Bottom Line
If you have $750,000 to invest, interest-bearing products can often give you a strong balance of 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 help 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 advisor matches at no cost to decide which one is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
For many consumers, the main way they generate interest is through their bank account. While this is often a negligible amount of money, if you pick the right bank those payments can add up.
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Source: https://finance.yahoo.com/news/750-000-earns-much-interest-130000070.html